4QQMN509 Principles of Economics
Macro Tutorial 2
1. Consider the following Cobb-Douglas production function:
2 1
Y = AK 3 L 3 . (1)
Both factors of production are assumed to be exogenously given and fixed over time. In partic-
ular, the available capital for production is K = 10 and the readily available labor is L = 270.
While the total factor productivity is given at A = 54.
The size of production in this economy is units.
(a) 800
(b) 1,620
(c) 2520
(d) 14,580
(e) not enough information is given
2. Using the information from question (1) before, it is possible to calculate the marginal products
of capital (MPK) an labor (MPL) by taking the partial derivatives of the production function
with respect to each factor.
1
∂Y 2 L 3
MPK = = A× × = 108
∂K 3 K
2
∂Y 1 K 3
MPL = = A× × =2
∂L 3 L
Knowing this information, the real rental price of capital, R/P = and the real wage
rate, W/P = .
(a) 2; 2
(b) 53 ; 72
(c) 108; 108
(d) 2, 108
(e) 108, 2
3. Using the information from question (1) before, we can calculate the real capital income to be
units, while the real labor income to be units.
(a) 108; 2
(b) 216; 4
(c) 540; 1080
(d) 1080, 540
(e) 2, 108
4. Write down the firm’s profit maximization problem if the production function is given by F(K, L),
the rental rate of capital is r and the wage is w. Be sure to identify the variables the firm can
choose and which it takes as given. What should the firm facing the following scenarios do?
• The marginal product of capital is greater than the rental price of capital.
• The marginal product of labor is less than the wage.
5. Over the lecture, we derived that the income paid to capital is MPK · K, while the income paid to
labor is MPL · L. Assuming a Cobb-Douglas production function in the form of Y = AK α L1−α ,
show that α can be interpreted as the share of total national income paid to capital.
6. Consider Figure 1 below.
Figure 1: Labor Market
In Figure 1, MPL represents the labor , L̄ represents the labor , and the
intersection of the two yields the .
(a) supply; demand; equilibrium wage
(b) demand; supply; equilibrium wage
(c) supply; demand; equilibrium rental rate of capital
(d) demand; supply; amount of capital hired
(e) demand; the discount rate; level of structural unemployment
7. (Difficult!) State whether the following production functions exhibit increasing, constant, or
decreasing returns to scale in K and L.
1 1
(a) Y = K 3 L 2
2
(b) Y = K 3 L
1 1
(c) Y = K 2 L 2
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