Suppose an economy's production possibilities are represented by the function Y = A K L where Y...
Question:
Suppose an economy's production possibilities are represented by the
function Y = A K L where Y represents total output (i.e GDP),
K is capital,
L is labor, and
A is total factor productivity (TFP) (aka efficiency or productivity parameter).
Moreover, suppose that there is a fixed supply of capital equal to 10 and a fixed supply of labor equal to 2.
TFP is equal to 1.
Set up the problem of a representative (aggregate firm) that maximizes profits taking as given a rental rate for capital (r) and a wage (w).
Calculate the equilibrium rental rate of capital and the equilibrium wage. Suppose that there is a shift in labor supply and wages drop by approximately 50%.
How large is the shift?
What happens to the equilibrium rental rate of capital? Discuss your results.
Total Output
Total output or Gross Domestic Product is the total worth of all commodities produced within a country in a particular year. The five main components of Gross Domestic Product are Consumption, Investment, Government Expenditure and Net exports. They are evaluated to measure the efficiency of economy.
Answer and Explanation: 1
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View this answer1. a) Output
{eq}Y = A \cdot K \cdot L {/eq}
{eq}{/eq}Since {eq}A = 1 {/eq}(given)
{eq}Y = K \cdot L {/eq}
We know that,
Cost is,
{eq}\ C = w...
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The Cobb Douglas Production Function: Definition, Formula & Example
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Chapter 1 / Lesson 7
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Learn the definition of a production function in economics, understand the definition of a Cobb-Douglas production function and its formula, and explore some examples of Cobb-Douglas production function.
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