Suppose that an economy has a Cobb-Douglas production function with three inputs. K is capital (the...

Suppose that an economy has a Cobb-Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among workers). Markets for output and factors of production are both competitive. The production function is Y = K^1/3*L^1/3*H^1/3

1. Prove that this technology shows constant returns to scale.

2. Solve the competitive firm’s profit maximization problem by deriving the first-order conditions.

3. An unskilled worker earns the marginal product of labor, whereas a skilled worker earns the marginal product of labor plus the marginal product of human capital. Find the ratio of the skilled wage to the unskilled wage. How does an increase in the amount of human capital affect this ratio?

Expert Solution

Rahul Sunny answered 2 years ago

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