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Consider a competitive profit-maximizing firm with Cobb-Douglas production function Yt = AtK t L 1 t that chooses the quantity of labor and capital, taking
Consider a competitive profit-maximizing firm with Cobb-Douglas production function Yt = AtK t L 1 t that chooses the quantity of labor and capital, taking rental rate rt and wage wt as given. Profits are defined as output net of payments to workers and capital owners. Question 2.1 Set up the problem for the profit maximizing firm. Question 2.2 By taking the first-order condition with respect to capital, derive the demand for capital as a function of the rental rate. In what follows, it will also be useful to use this equation in logarithms
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