Production and income distribution Consider and economy with the following production technology: ,Y = 9K1/3L 2/3 where the aggregate capital stock is K=100, and aggregate labor is L=100. The price of output is 1. a) Write down the maximization problem of the firm. b) Compute the equilibrium wage and capital return. c) Compute total payments to labor and capital. Show Euler’s Theorem holds, i.e. show that total payments to capital and labor equal the value of output.
xercise 5: Production and income distribution
Consider and economy with the following production technology: ,Y = 9K1/3L
2/3 where
the aggregate capital stock is K=100, and aggregate labor is L=100. The price of output is
1.
a) Write down the maximization problem of the firm.
b) Compute the equilibrium wage and capital return.
c) Compute total payments to labor and capital. Show Euler’s Theorem holds, i.e. show
that total payments to capital and labor equal the value of output.
d) What share of output goes to labor and capital?
e) Suppose there is an increase in L, what would be impact on wages and capital returns?
Explain.
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