= L2K2, 3. Imagine we live in a classical world. Suppose that the production function is Y where L is the amount of labor and K is the amount of capital. The economy has 100 units of labor and 100 units of capital. a. Does the production function show Constant Returns to Scale? Why? b. Derive an expression for the marginal product of labor. Is the marginal product of labor diminishing? How does an increase in the amount of capital affect the marginal product of labor? Explain. c. What are the real wage and rental price of capital? d. What is the income share paid to labor? What is the income share paid to capital?

= L2K2, 3. Imagine we live in a classical world. Suppose that the production function is Y where L is the amount of labor and K is the amount of capital. The economy has 100 units of labor and 100 units of capital. a. Does the production function show Constant Returns to Scale? Why? b. Derive an expression for the marginal product of labor. Is the marginal product of labor diminishing? How does an increase in the amount of capital affect the marginal product of labor? Explain. c. What are the real wage and rental price of capital? d. What is the income share paid to labor? What is the income share paid to capital?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

3. Imagine we live in a classical world. Suppose that the production function is Y = L²K²,
where L is the amount of labor and K is the amount of capital. The economy has 100
units of labor and 100 units of capital.
a. Does the production function show Constant Returns to Scale? Why?
b. Derive an expression for the marginal product of labor. Is the marginal product of
labor diminishing? How does an increase in the amount of capital affect the marginal
product of labor? Explain.
What are the real wage and rental price of capital?
d. What is the income share paid to labor? What is the income share paid to capital?
C.

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