Consider the VES (Variable Elasticity of Substitution) production function Q(K,L)=AK^(a)(L+caK)^(b) depending on capital K and labour L
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Consider the VES (Variable Elasticity of Substitution) production function Q(K,L)=AK^(a)(L+caK)^(b) depending on capital K and labour L with A,a,b and c parameters. (A,K,L are all positive, a > 0,b > 0 and c >= 0 ). The production is constrained by p_(K)K+p_(L)L-E=0 with positive constants p_(K),p_(L) and E. (a) Consider the general case of a constrained production function. Write down the Lagrangian L(K,L;lambda), the FOCs, including L_(L)|_((K_(**),L_(**)))=bQ_(**)//(L_(**)+caK_(**))-lambdap_(L)=0, and derive the stationary point (K_(**),L_(**)), expressed in terms of p_(K),p_(L),a,b,c (hint: use d=b-ac(a+b)p_(L)//p_(K) to simplify the answer). Here L_(L)=delL//del L and Q_(**)=Q(K_(**),L_(**)).
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