Consider a firm with production of the form: Q = ALK. The marginal products associated with the production function are MPL=AK, MPK=AL. The input price of labour is w and the input price of capital is r.

A) Determine whether the production function exhibits increasing, decreasing, or constant returns to scale. (5 marks)

B) Derive the input demand functions. (10 marks)

C) Suppose the price of labour equals the price of capital (ie. w=r). Does the firm use more labour, more capital, or equal amounts to produce a given quantity? How do you know? (5 marks)

D)Now suppose the price of labour increases from w to w' (where w'>w). Will the firms' demand for labour and capital change? If so how? (5 marks)