Final output in the economy is pro-duced using capital K and labor L. The production function is:Y = ĀK/ L^/5Assume that the supply of all inputs are exogenous and equal to L and K. Perfectly compet-itive firms are price-takers and choose how much capital and labor to demand by maximizingprofits. Let w and r denote the wage and rental rate of one unit of labor and capital respec-tively. (a) What are the 5 endogenous variables in this model? Also list the exogenous variablesand the parameters and provide a brief explanation of each.(b) Show the first order conditions for labor and capital. Explain the intuition for whythese conditions are optimal for a firm. Are there diminishing returns to these inputsin this model?

Endogenous variables are those variables which are determined with relation to other variables in a…

(a) What are the 5 endogenous variables in this model? Also list the exogenous variables and the parameters and provide a brief explanation of each. I (b) Show the first order conditions for labor and capital. Explain the intuition for why these conditions are optimal for a firm. Are there diminishing returns to these inputs in this model?

(a) What are the 5 endogenous variables in this model? Also list the exogenous variables and the parameters and provide a brief explanation of each. I (b) Show the first order conditions for labor and capital. Explain the intuition for why these conditions are optimal for a firm. Are there diminishing returns to these inputs in this model?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter9: Production Functions

Section: Chapter Questions

Problem 9.9P

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