1. Draw the function Y = F(K, L¯) in terms of Y and K, for some fixed L. On the same graph, plot the cost function for renting a certain amount of capital at a rental price of R, i.e. RK. For a profit maximizing firm, illustrate graphically how much capital they would choose to employ.
2. Consider a production economy as per class/Mankiw Ch.3 as follows: • Y = F(K, ¯ L¯) • Y = c(Y − T¯) + I(r) + G • w = MP L, R = MPK Suppose an earthquake destroys a chunk of the capital stock. What happens to Y , R, w, C, I? 3.