Question

Suppose that an economy’s production function is Cobb-Douglas with parameter a=0.36,

and is given by

Y= AK^a L^1-a

(a) Prove that this Cobb-Douglas function has constant returns to scale.

(b) What fraction of income do capital and labor receive?

(c) Suppose that immigration raises the labor force by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?

(d) Suppose that a gift of capital from abroad raises the capital stock by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?