Question
Suppose a sudden increase in the use of automation and AI spreads through the economy. Firms invest in the construction of new physical capital needed
Suppose a sudden increase in the use of automation and AI spreads through the economy. Firms invest
in the construction of new physical capital needed to use these approaches to production. Use the
Classical model of the closed economy in the long run to explain the following related scenarios.
a) Describe the impact to the real wage and real rental price of capital that occurs in the long run
equilibrium that immediately follows the decision to adopt these approaches. Support your answer
with TWO diagrams one for the rental market for labour and one for the rental market for capital.
Label the new LR equilibrium points as point B in both diagrams.
b) Describe the impact to the real wage and real rental price of capital that occurs in the very long run
equilibrium following the decision to adopt these approaches. Support your answer using your TWO
diagrams one for the rental market for labour and one for the rental market for capital (i.e. use the
same pair of diagrams for both part A & part B). Label the new very LR equilibrium points as point
C in both diagrams.
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