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Unformatted text preview: Problem Set 2 Macroeconomics II PSE Not Due Question 1 Profit Functions Consider a static model of a firm that produces output using a Cobb-Douglas combination of capital and labor: Y = K α L 1- α , < α < 1 . Take the product price p , the wage rate w and the rental rate of capital, r as exogenous and given. Part 1.1 What is the firm’s optimal choice of labor input L given capital K , p , r and w ? Find profits as a function of K , p , r , w and call this function G . Part 1.2 Show that G is linear in capital K and convex in the price of output, p . Part 1.3 Find the optimal choice of capital using the profit function g ( p , r , w ) . Question 2 Tax Credits Corporations in the United States are allowed to subtract depre- ciation allowances from their taxable income. The depreciation allowances are based on the purchase price of the capital; a corporation that buys a new capital good at time t can deduct a fraction D ( s ) of the purchase price from its taxable income at time t + s . Depre- ciation allowances often take the form of...
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This note was uploaded on 01/05/2011 for the course ECO 1892 taught by Professor J.baran during the Spring '10 term at Paris Tech.
- Spring '10