Question

The Cobb-Douglas production function is given as:

Q = AK1-aLa

Where 0<a<1, a = .8, K =4 is the amount of capital, and L=16 is the number of unit of labor, and A = 12 is the measure of TECHNOLOGY INDEX

a) Find the real wage of labor (marginal product of labor), W/P,

(b) Find rate of return of capital (marginal product of capital), and

(c) Discuss the insights of your findings.

(d) Why is there not a large amount of capital flows to India from the U.S. when there is an additional factor of production such as human capital as follows?

Q = AK1-aLa Hr

Answer 1

4 MONDAY 8= Akta a 8= AKO.220.8 given ic=4 a=0.8 | = 16 A =12 measure of Tehnology index) MP = 88 = AX0.810.2 0.8-1 al = AXO8X60.2 x L -0.2 = AXO.8 x K7o. 2 - =12x0,8 x 4 430.2 = 7.2754 TUESDAY MPK = 0o = AX/1-ak l-a-1 La ok = A x70,2) K-0.8 0.8 =12x82) x 4-0.8 x 160.8 = 7.2754 C 16 @ Mp you real wage of tabour = 7.2759 for (6) MP 1/or real rate of rehan on capital = 7.275996 we might say that each addtional unit of labour or capital will increase the level of odlepit by the same amount.

Also, if we move one unit of labour and inhotdure one additional wait of capital, there will be wo change in output as a one unir fall in labour wire nedme output by 7.2754 units But an incremental unit of capital will increase output by 7.2754 units.
d. The absorption of capital flows is limited by the size of the current account deficit, which has been low in India. In this situation, large capital inflows are a stress on the real economy through exchange rate appreciation . This not only affects exporters, but also affects the profitability of domestic producers through pressures on domestic prices, unless productivity goes up substantially.

There may be other factors as well. If wr look at the issue from another point of view,we know that the value of Human capital in india is less. That is their real value is much less in India than it is in the US along with all the extra opportunities that US offers.