Question

Have question about 7 and 8. Could you please explain why both of these are wrong?

77. In a competitive market where worker's wage (W), rental rate of capital (R) and the price of output (P) are exogenous any firm will hire workers and capital up to the point where MPL =W/P and MPK = R/P. T8. For a country with a Cobb-Douglas production Y = F(KL) – AK"L" (A > 0,0 <01 1,0 < < 1 being constant parameters), its national income always equals to the sum of labor income and capital income.

Answer 1

7) when there are two inputs, competitive market follow the equimarginal principle rule where

MPL/W = MPK/R

This is necessary because the optimal number of labour and capital input must ensure the marginal product per dollar of the last unit produced should be equal across all the inputs. However when only one of the input is variable the necessary condition becomes MPL = W/P or MPK = R/P

8) national income is the sum of labour share of income and capital share of income only when the sum of alpha 1 and alpha 2 is 1. National income can be greater than the sum of labour share of income and capital share of income.when the sum of alpha 1 and alpha 2 is greater than 1. Hence it is not true always but under specific condition..