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α ∗ z K L K L

This document discusses how setting the derivative of the profit function with respect to capital equal to zero results in the marginal product of capital being equal to the marginal cost of capital. It shows that this leads to a relationship where the amount spent on capital services equals a constant fraction, alpha, of firm output. The document notes that since spending on capital must equal capital income received in aggregate, and capital income accounts for 32% of total income based on previous analysis, alpha can be estimated as 0.32. Economists call alpha the "capital share" in production.

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Akash Kumar
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47 views1 page

α ∗ z K L K L

This document discusses how setting the derivative of the profit function with respect to capital equal to zero results in the marginal product of capital being equal to the marginal cost of capital. It shows that this leads to a relationship where the amount spent on capital services equals a constant fraction, alpha, of firm output. The document notes that since spending on capital must equal capital income received in aggregate, and capital income accounts for 32% of total income based on previous analysis, alpha can be estimated as 0.32. Economists call alpha the "capital share" in production.

Uploaded by

Akash Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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setting the derivative of the profit function with respect to Kt equal

to zero. This derivative is


α ∗ ztKα−1
t L1−α
t
− rt = 0. (2.7)
As already noted, αztKα−1
t L1−α
t is the marginal product of capital
because it expresses howmuch output will increase if capital increases
by one unit.3 Equation (2.7) therefore satisfies the restriction that the
marginal revenue froman additional unit of capital – the extra output
gained from one additional unit of capital – is exactly equal to the
marginal cost of an additional unit of capital, rt . In other words, the
marginal benefit of capital is equated to its marginal cost.
Now, multiply (2.7) by Kt and rearrange terms. This gives the
following relationship:
Kt ∗ α ∗ ztKα−1
t L1−α
t
= rt ∗ Kt (2.8)
α ∗ Yt = rt ∗ Kt . (2.9)
Equation (2.9) follows from (2.8) because Kt ∗ ztKα−1
t L1−α
t
=
ztK α
t L1−α
t which is equal to Yt . Equation (2.9) states that when firms
optimize, the amount they spend on capital services (rt ∗ Kt) is equal
to a constant fraction α of the value of firmoutput Yt.Now, since every
dollar spent is a dollar earned, the amount paid for capital services by
firms in the aggregate must be equal to capital income received in the
aggregate. We learned from Chapter 1 that capital income accounts
for about 32 percent of total income. This gives us an estimate of α for
use in our production function: 0.32. Economists call α the “capital
share” in production.
Also note that because α is a constant parameter in the production
function, equation (2.9) implies that capital income is a constant

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