Consider Two Competitive Economies That Have the Same Quantities of Labour

question 51

Essay

Consider two competitive economies that have the same quantities of labour (L = 400) and capital (K = 400), as well as the same technology (A = 100). The economies of the countries are described by the following Cobb-Douglas production functions:
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North Economy: Y = A L^.3K^.7
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South Economy: Y = A L^.7K^.3
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a.Which economy has the larger total production? Explain.
b.In which economy is the marginal product of labour larger? Explain.
c.In which economy is the real wage larger? Explain.
d.In which economy is labour's share of income larger? Explain.​

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Definitions:

Spillover Costs

Costs that affect parties who are not directly involved in a transaction or economic activity.

Advertising

The activity or profession of producing advertisements for commercial products or services, aiming to influence consumer behavior and preferences.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, with elasticity greater than one indicating elastic demand.

Brand Names

The names given to products or services by companies to distinguish them in the market and build company identity.