Suppose the production function for a country is given by: Y = F (K, L) = K0.4L0.4
a) Does this production function have constant returns to scale? Explain. Now suppose the country has the following production function:
Y = F (K, L) = K0.4L0.6
b) Is the production function above constant returns to scale? Explain.
c) Now using the production function in (b), and suppose total physical capital, K, is 6400, and total labour available is 12,000. What is total income in the economy? Explain.
d) From the production function in (b), we can solve for the marginal products of capital and labour as: MPK= .4K-.6L0.6
MPL = .6K.4L-.4
Given the information above and in previous questions:
I. What is the total income paid to labour in this economy?
II. What is the total income paid to capital owners?
III. And how much of the total income consiss of profitts by firms?