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.