ECON 330D1 Lecture Notes - Lecture 4: Autarky, Production Function, Free Variables And Bound Variables
Document Summary
Economic profit = y mpl *l mpk * k. Because we are interested in the division of national income. Y= mpl *l +mpk *k + economic profit. By eulers theorem a crs prod function can be written as y= fl(k,l)=mpl*k+mpl*l. In reality firms own capital, people own firms. Accounting profit = economic profit + mpk *k. Observation: the division of national income between capital and labor had been roughly constant over a long period of time. Constant factor shares capital income= y increases capital share of income. Douglas asked cobb what production function would produce constant factor shares if factor shares . if factor always earned their marginal products. Note an increase in capital raises the mpl and reduces the mpk and increase. An increase in labor raises the mpk and reduces the mpl. A technologic advance (a ^) raises the marginal product of both factors. What determines the demand for goods and services for goods and services.