14E022 Macroeconomics I

Problem Set # 1

Prof. Julian di Giovanni

Universitat Pompeu Fabra and Barcelona GSE

Due: Tuesday, October 6, 2015

1. Suppose that a firm employing k units of capital per worker produces y units of output
per worker, where y = k 2/3 .

(a) What is the marginal product of capital, ∂y/∂k?

(b) What is the marginal product of capital if the firm has k=1, what if the firm has
k=2, what if the firm has k=3?
(c) Is the marginal product of capital increasing or decreasing as the firm uses more
capital?
(d) Now suppose that the firm’s profit, π is a function of its output per worker y,
π = y 1/3 . What is the profit that the firm makes from producing an additional
unit of output per worker, ∂π/∂y?
(e) What is the profit from employing an additional unit of capital, ∂π/∂k?
2. The function F (K, L) is homogenous of degree d if F (λK, λL) = λd F (K, L) for all
λ > 0. If d = 1, the function is said to be linear homogenous (or subject to CRS if it
is a production function).

(a) Consider the constant-elasticity of substitution (CES) production function F (K, L) =

1
[αLσ + (1 − α)K σ ] σ , where 0 < σ < 1 and 0 ≤ α ≤ 1. Show that the CES pro-
duction function is CRS.
(b) Define ρ to be the elasticity of substitution in production. In the case of CES,
solve for ρ as a function of the parameters of the production function and show
that it is indeed constant.
(c) If production factors are paid their marginal products, all output is paid out to
production factors. Show that if F (K, L) is linear homogenous, then F (K, L) =
[∂F (K, L)/∂K]K + [∂F (K, L)/∂L]L (this result is called Eulers theorem). What
does this imply about the profits of a perfectly competitive firm producing subject
to constant returns to scale?

1
 (d) Solve for the MPK and MPL for the CES production function and show that the
result in (c) holds for this function.

3. Recall some basic properties of the log function, where Ẏ (t) denotes the derivative of
Y (t) with respect to time:

ln AB = ln A + ln B
A
ln = ln A − ln B
B
ln Aα = α ln A
∂ ln Y (t) Ẏ (t)
=
∂t Y (t)

(a) Implications of change in the growth rate for the evolution of a variable. Suppose
that the growth rate of some variable, Y is constant and equal to a < 0 from
time 0 to time t1 ; rises to 0 at time t1 ; rises gradually from 0 to b, b > 0, from
time t1 to time t2 ; and is constant and equal to b after time t2 . Sketch a graph
of:
i. The growth rate of Y as a function of time.
ii. ln Y as a function of time.
(b) Show that
Ż(t) Ẋ(t) Ẏ (t)
i. If Z(t) = X(t)Y (t) then Z(t) = X(t) + Y (t) .
X(t) Ż(t) Ẋ(t) Ẏ (t)
ii. If Z(t) = Y (t) then Z(t) = X(t) − Y (t) .
Ż(t) Ẋ(t)
iii. If Z(t) = X(t)α then Z(t) = α X(t) .
Ż(t)
iv. If Z(t) = X(t)α Y (t)β then Z(t) = α Ẋ(t) Ẏ (t)
X(t) + β Y (t) .
X(t)α Ż(t)
v. If Z(t) = Y (t)β
then Z(t) = α Ẋ(t) Ẏ (t)
X(t) − β Y (t) .
(HINT: use useful properties of the log function)