Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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2nd time puting this Question ....plzzz need a salutations
![Problem 1
Suppose firms have a CES production technology
Y = [(AK)º + LºJË
where -o <p<1 is the CES parameter and A is the productivity of capital. Both p
and A are constant parameters. Y is the firms' output and K and L are capital and
labor inputs.
Firms choose K and L to maximize the profit function:
1
max n = [(AK)º + Lº]P – rK – L.
K,L
K
Let k = be the capital·labor ratio. Suppose p = 0.5.
%3D
Q1: Suppose r increases. Does optimal k increase?
Q2: Suppose A increases. Does optimal k increase?
Q3: Are capital and labor substitutes or complements?
(Q4 and Q5 will follow in the next page.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab04788a-73aa-4398-b9c3-0d49807fad02%2F061ae2a8-1f06-4d90-8a26-ffdbd60dad2e%2F79xd14_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 1
Suppose firms have a CES production technology
Y = [(AK)º + LºJË
where -o <p<1 is the CES parameter and A is the productivity of capital. Both p
and A are constant parameters. Y is the firms' output and K and L are capital and
labor inputs.
Firms choose K and L to maximize the profit function:
1
max n = [(AK)º + Lº]P – rK – L.
K,L
K
Let k = be the capital·labor ratio. Suppose p = 0.5.
%3D
Q1: Suppose r increases. Does optimal k increase?
Q2: Suppose A increases. Does optimal k increase?
Q3: Are capital and labor substitutes or complements?
(Q4 and Q5 will follow in the next page.)
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