Question
Suppose that the economy's output is produced by the following Cobb-Douglas production technology: Y(t) = K(t)[L(t)*E(t)], where K refers to the units of capital (machines),
Suppose that the economy's output is produced by the following Cobb-Douglas production technology: Y(t) = K(t)[L(t)*E(t)], where K refers to the units of capital (machines), L is total units of labor used in the production process, and E is the stock of knowledge. In the beginning, the economy has equal amount of capital and labor (K = 67 and L = 33 units), and the stock of knowledge is one (E = 1).Parameters = 0.33
and = 0.67. a. Suppose that education enhances the efficiency of labor according to the following formula: E(t+1) = 0.2*E(t) where E(t=0) = 1. Assuming that everything else remains unchanged, how much does the economy produce at period t=5, after five (5) periods of educating labor? Discuss and show your results. b. How much an employer would be willing to pay for educating an employee? [Hint: what is the marginal value of labor due to the accumulated education (E)?] Discuss and show your results.
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