Term
| prove constant returns to scale |
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Definition
F (2K; 2L) = A(2K)^1/3 (2L)^2/3
= A* 2^(1/3)K^(1/3)*2^(2/3)L^(2/3)
= 2*AK^(1/3)L^(2/3)
= 2F (K; L) : |
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Term
| why the constant returns to scale is important |
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Definition
allows us to model all
rms in the economy
as if there was just one
rm. This is because constant returns to scale implies
that we can just add all
firms up. |
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|
Term
| write the problem that a typical
firm solves in the production model |
|
Definition
Max profit (constraint by K, L) is
F (K; L) - wL - rK |
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Term
| firms profit maximization condition |
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Definition
| produce where MPK=r and hire where MPL=w |
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Term
| why it is useful to re-written the production function in per-capita terms |
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Definition
per-capita output allows for a more useful comparison of output or income across countires. The
aggregate production function is not appropriate because countries with larger populations will typically have greater aggregate output. Per-capita, or average, income, however controls for population size and is therefore a better measure of economic welfare. |
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Term
| 1st period budget constraint |
|
Definition
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