Suppose that the production function of the economy is: Y = AK0.5 L(10.5)
Consider the following hypothetical scenario regarding an expansion of the labor supply through immigration. An economy is initially in equilibrium with a capital stock K and an initial labor supply L1. Suppose that a wave of immigration increases the size of the labor supply to L2 = 4.L1.
1. Find the ratio of output after the immigration wave to output before the immigration wave Y2/Y1.
2. Find the ratio of the new real wage to the initial real wage:
(W/P)2/(W/P)1
3. Find the ratio of the new real rental rate to the initial real rental rate: (R/P)2/(R/P).
4. Suppose that the new residents do not acquire ownership of any capital so that even after the immigration wave, the original residents continue to receive all of the income paid to capital. As a result of the immigration wave, does the total income paid to the original householdsincluding wage and rental incomeincrease, decrease, or stay the same.