Question: Consider a firm with an production function Y = AKL 1. Suppose the wage rate is w and the rental rate is r. Imagine that

Consider a firm with an production function Y = AKL 1. Suppose the wage rate is w and the rental rate is r. Imagine that output can be sold at a price of 1 per unit.

1. What is the labour and capital used by the firm if it is profit maximizing?

2. What is the total share of labour income as a fraction of total revenue generated?

3. What is the total share of capital income as a fraction of total revenue generated?

4. What happens to the use of labour input and capital input as A increases?

5. What happens to the use of labour and capital inputs as w increases?

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