V2

Gardenia is a perfectly competitive economy with K amount of capital and & amount of labour. There is full employment in Gardenia. That is, all factors of production are fully employed. Technology is described by a Cobb- Douglas production function given by: P = F(K,L) = A(R) "(L)7. Now in a turn of luck, Gardenia was quickly able to restore the capital stock destroyed by the tsunami so that the capital stock has returned to its initial level (its level before the disaster). In addition, Gardenian scientists discovered a cure to a widespread disease. This will permit the Gardenian labour force to be 20% higher. What will happen to the real rental rate in Gardenia as a result of this increase in the labour force? A) It will remain unchanged B) It will fall by 15.7% C) It will increase by 5.6% D) It will increase by 13.6% 8. Following on Question 7 (where Gardenia had a 20% increase in its labour force while the capital stock was at its initial level) what will happen to labour's share of national income after the increase in the labour force? A) It will remain unchanged B) It will increase by 20% C) It will increase by 12.5% D) It will decrease by 20%