Production Function Flashcards
Cobb Douglas - Y=
AK^(1/3)L^(2/3)
Capital Hiring Rule:
1/3 x Y/K = r
Labour Hiring Rule:
2/3 x Y/L = w
Capital Hiring Rule in equilibrium:
r* = 1/3.A̅.(L̅/K̅)^2/3
Labour Hiring Rule in equilibrium:
w* = 2/3.A̅.(K̅/L̅)1/3
r* is proportional to…
Y/K by 1/3
w* is proportional to…
Y/L by 2/3
TFP measures…
how efficient countries are using their factor inputs
A lower TFP means…
for any given level of capital per person, workers produce less output than a country with a higher TFP
TFP Determinants:
Human Capital, Technology, Institutions (Separation of powers, property rights), Financial system, Natural resource endowment, Location, Health, Monopolies,
Y = K + K^(1/3)L^(1/3) exhibits…
Decreasing returns to scale
Y = K + L exhibits…
Constant returns to scale
Y = K^(1/3)L^(2/3) + A exhibits…
Decreasing returns to scale
Y = K^(1/3)L^(2/3) - A exhibits…
Increasing returns to scale
Y = AK^(3/4)L^(1/4) - y =
y = A(K/L)^(3/4)
