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2. Solving the production model: Suppose the production function at the core of our model is given by Y = AK 3/4]1/4 (that is, assume
2. Solving the production model: Suppose the production function at the core of our model is given by Y = AK 3/4]1/4 (that is, assume the exponents on capital and labor are 3/4 and 1/4 rather than 1/3 and 2/3). (a) Create a new version of Table 4.1 for the new version of the model. What are the five equations and five unknowns? (Hint: The hiring rules for capital and labor will change in the obvious way.) (b) Now solve these equations to get the solution to the model. Put your solution in the same form as Table 4.2. (C) What is the solution for the equilibrium level of output per person? TABLE 4.1 The Production Model: 5 Equations and 5 Unknowns Unknowns/endogenous variables: Y, K, L, r, w Production function Y = AK 1/3 2/3 - Rule for hiring capital 1 Y =r 3 K 2 Y 3 L =W Rule for hiring labor Demand = supply for capital K=K Demand = supply for labor L = 1 Parameters/exogenous variables: , K, L TABLE 4.2 The Solution of the Production Model Capital Labor 2/3 Il A Rental rate K* = K I = 1 Y* 3K* 3 2 Y* 2 w = 3 L* 3 Y* = AK 1/3 2/3 K K 1/3 Wage : CE ( Output
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