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Problem 2: Revisiting CES Production Function Consider the following Cobb-Douglas function Y = K L-a (a) What are the endogenous variables? What are the
Problem 2: Revisiting CES Production Function Consider the following Cobb-Douglas function Y = K L-a (a) What are the endogenous variables? What are the markets that define equilibrium? (b) Find the equilibrium values of the endogenous variables as functions of the model param- eters and exogenous variables for the production model. (c) Formally show what the factor shares of labor and capital are equal to in equilibrium. Now, consider the CES production function Yt = F(K,Lt) = [(a) (K) - [(a)(Ki)" + (1 a)(Li)] * (d) Find the equilibrium values of the endogenous variables as functions of the model param- eters and exogenous variables for the production model. (e) (challenging question: 1 point extra credit) Formally show what the factor shares of labor and capital are equal to in equilibrium. What do you notice about the factor shares of labor between your answers from (b)? What does this tell you about the suitability of using Cobb-Douglas function when you want to study decline in labor income share of GDP?
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