A countrys production function is given as Y A K 04 L 06 If

A country’s production function is given as Y = A K ^0.4 L ^0.6. If Y = $170 billion,

a. what is real labor income (labor’s share of income)?

b. what is real capital income (capital’s share of income)?

Solution

Y = AK^0.4L^0.6

Y = $170 Billion

(a) Real Labor income ($ Billion) = 170 x 0.6 = 102

Labor\'s share of income = 0.6 (Coefficient of L in production function)

(a) Real Capital income ($ Billion) = 170 x 0.4 = 68

Capital\'s share of income = 0.4 (Coefficient of K in production function)