Part 1) Consider the Cobb-Douglas production function: Y = AK'-ªLª. where K and L are the capital stock and labor uses respectively. Consider that the economy is composed of a representative firm that maximizes profits by hiring L workers and paying them some real wage w, for a total wage bill of wL The firm also rents capital K at a rate r, paying rK. Labor and capital are its only costs. a) Define the labor share and the capital share of income. What do they represent? b) Write the firm's profit function. c) Calculate the firm's choice of labor and capital inputs, taking prices as given.

Part 1) Consider the Cobb-Douglas production function: Y = AK'-ªLª. where K and L are the capital stock and labor uses respectively. Consider that the economy is composed of a representative firm that maximizes profits by hiring L workers and paying them some real wage w, for a total wage bill of wL The firm also rents capital K at a rate r, paying rK. Labor and capital are its only costs. a) Define the labor share and the capital share of income. What do they represent? b) Write the firm's profit function. c) Calculate the firm's choice of labor and capital inputs, taking prices as given.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter11: Profit Maximization

Section: Chapter Questions

Problem 11.8P

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