1. Suppose the aggregate production function of the UK economy is given by Y = AKL^1- where A is a constant, K are units of capital and L are units of labor. The price of output is one, and the labor market is perfectly competitive. [2 pts]

(a)Suppose that A = 10, = 0.5, L = 40, and K = 160. Calculate the wage rate.

(b)Suppose that immigration increases L by 10 units and K by 40 units. What happens to the wage rate?

(c)Explain why immigration might increase not only labor L but also capital K and how an increase in capital K can bring the wage rate back to its pre- immigration level in the long run.