Answer to Question #257497 in Economics for Akhona Klanisi

Question

1.(Capital and the Labour Market, Question with Mathematical) derivations). Consider our 4- quadrant model (for 1 sector only), take everything as standard there, but with the following particular specification : the production function is given by

Y= AK^aL^1-a , with 0 ≤a≤1

d.      Forget anything you have been told about the shape of the MPL as a function of L in class. Suppose in this sector, capital can be rented freely at r such that MPK= r . What does the four- quadrant equilibrium look like in this case? (It’s still the case that p1= MPL, and the MPL is a function of A, K, L).

Answer 1

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