Industries in the country of Technologia invest in new equipment that annually increases productivity of private workers by 3 percent. Government employees do not benefit from similar technical advances.
a. If wages in the private sector are set equal to the value of the marginal product, how much will they rise yearly?
b. Government workers annually receive increases so that wages remain comparable to those in the private sector. What happens to the price of public services relative to privately produced goods?
c. If the same quantity of public services is produced each year, what happens to the size of the government (measured by spending)?