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QUETIDN 1 This question explores some of the points discussed in the rst lecture, with regards to the Simple Model of Production. It is also

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QUETIDN 1 This question explores some of the points discussed in the rst lecture, with regards to the Simple Model of Production. It is also designed to test your understanding of Chapters 3 and 4 of the prescribed textbook. Consider an economy with the following Cobb-Douglas production function: r = AKI'LF Further, assume the assumptions made in lecture I hold and that alpha and beta are both strictly positive. Answer the following questions: a} Forthis part of the question only, assume (I = {1.2 and ,3 = 1.1. Provide an interpretation for the exponent of the capital input. h} Find expressions for the marginal product of capital [MFR] and labour (MIPL) in this economy, using a and E. For what values of or and ,3 would the assumption of diminishing return to inputs is satised? Provide a brief explanation of what diminishing returns to inputs mean. c} Derive the demand for capital from a typical rm in this economy. 1What can you say about the supply of capital in the simple model of production? d} Now, suppose there is a sudden decrease in the supply of labour in this economy (i.e., an exogenous change in the number of workers available for production]. 1What do you expect to happen to the real rental rate and the real wage in this economy? Provide mathematical, graphical and economic explanations

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