Answer to Question #257492 in Economics for Akhona Klanisi

Question

1.

(Capital and the Labour Market, Question with Mathematical) derivations). Consider our 4- quadrant model (for 1 sector only), take everything as standard there, but with the following particular specification : the production function is given by

Y=AK^aL^1-a, with 0 ≤a≤1

a.      Show graphically the equilibrium in the labour market, taking A, K as fixed and given.

b.     Write down the key equation behind each quadrant.

c. Suppose an interest rate change has the following two effects: K goes down (less capital is used in production and the MPL in quadrant- I still takes this now-lower quantity of K as given) and β goes down. What happens to the equilibrium in the labour market, compared to (a)? (Illustrate graphically, if there any shift on the curve please explain). 

Answer 1

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