Question: Consider the following production function: Y = AK 1!!L!, where Y is production, A is productivity, K is capital, L is labor, and 2

Consider the following production function: Y = AK

1!!L!, where Y is production, A

is productivity,

K is capital, L is labor, and " 2 (0, 1) is a parameter. Let w denote the wage rate and

r denote the rental

rate of capital. Solve the profit maximization problem of the firm:

max

K,L

AK

1!!L! !

wL ! rK. What

is the expression for rK and wL? Comment on your results. Show every step of all calculations.

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