1 The Cobb-Douglas production function Suppose that the world is described by the Solow model, and that the production function is: where = 1 F(K, L) AK L 0 < < 1 . As you will see in your microeconomics course, this is known as the Cobb-Douglas production function. It has some very handy properties. a) Show that this production function is "neoclassical," in the sense that it obeys the six conditions I outlined in lecture. b) In the formulation above, technological progress is neutral. Show that with a suitable transformation of A we can rewrite the function so that technological progress is labor augmenting. c) Find the equilibrium wage ( ). wt d) Find the equilibrium rental rate on capital ( ). tr e) Poor countries have a low capital-to-labour ratio, where rich countries have a high capital-to labor ratio. What does this model imply about relative wages and interest rates (assume the same level of technology in both countries) in rich and poor countries? f) What is labour's share of output wtLt Yt / ? g) What is capital's share of output tKt Yt r / ?