week 2

Question 1

What are 2 assumptions of the production function?

Answer 1

1 closed economy
1 consumption good

Question 2

What are the 2 inputs

Answer 2

Capital and Labour

Question 3

What is the typical cobb douglas production function?

Answer 3

Y = F(K,L) = AK^(1/3)L(2/3)

Question 4

What are returns to scale?

Answer 4

It is the return from putting some input into the production function. Depending on if the returns, we can have either increasing, constant or diminishing returns to scale.

Question 5

How do we denote output per capita?

Answer 5

y = f(k) = Y/L = F(K/L,1) where
k = K/L

Question 6

What is the per capita production function?

Answer 6

y = Y/L = A(K/L)^(1/3)
y= Ak^(1/3) where k = K/L

Question 7

How can we write the equation to model the allocation of resources to maximise profit?

Answer 7

max(π) = F(K,L) - rK - wL

Profits = Revenue - total rent of capital - total wage of labour

Question 8

How do we find the maximisation of profits? What are the results for power holders?

Answer 8

Take the FOC of the profit function
MPL = w and MPK = r

So hire capital and increase abour until the conditions are met