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Consider a closed (no trade) economy "I" with a fixed labor force equal to 1000 and...

Consider a closed (no trade) economy "I" with a fixed labor force equal to 1000 and a fixed capital stock equal to 100 (L=1000, K=100). There is a representative firm with a Cobb-Douglas production function that rents capital and hires labor to produce. ASsume that TFP parameter equals one (A=1) , we have Y=K^1/3 L^2/3. Markets are competitive.

1. Solve for the equilibrium in this economy using the production function. You should get numbers for (Y,K,L,w,r).

2. Solve for the marginal product of capital (MPK) and marginal product of labor (MPL). What is total income when summed as the income going to capital and income going to labor.

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Answer #1

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