The economy's aggregate production function is given by: Y = AK + BL Where A and B are constant parameters while K and L denote, respectively, the economy's stock of capital and labour. a)What are the properties of the production function? Does it display constant returns to scale? Is it increasing in the input factors? Does it display decreasing marginal returns? How do the properties of this production function compare to the more 'traditional' Cobb-Douglas production function? b)Suppose that in the economy markets are perfectly competitive. The government claims that in the economy the value of total output is fully shared between capital and labour. Is the government correct? c)Assuming perfect competition in all markets where workers are paid a wage W and the rental rate of capital is R, what is the expression for the share of GDP accruing to labour, that is WL/PY. How does this expression differ from what you would obtain if the aggregate production function were Cobb-Douglas
The economy's aggregate production function is given by:
Y = AK + BL
Where A and B are constant parameters while K and L denote, respectively, the economy's stock of capital and labour.
a)What are the properties of the production function? Does it display constant returns to scale? Is it increasing in the input factors? Does it display decreasing marginal returns? How do the properties of this production function compare to the more 'traditional' Cobb-Douglas production function?
b)Suppose that in the economy markets are
c)Assuming perfect competition in all markets where workers are paid a wage W and the rental rate of capital is R, what is the expression for the share of GDP accruing to labour, that is WL/PY. How does this expression differ from what you would obtain if the aggregate production function were Cobb-Douglas?
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