Answer

Solution

1. 1

   With $k = K/L$:

2. 2

   \begin{itemize}[leftmargin=*]

3. 3
   • If $K < L$ (i.e.\ $k<1$), $Y = AK$, so $\partial Y/\partial K = A$ and $\partial Y/\partial L = 0$. Hence $R = A$, $W = 0$.
4. 4
   • If $K > L$ (i.e.\ $k>1$), $Y = AL$, so $\partial Y/\partial K = 0$ and $\partial Y/\partial L = A$. Hence $R = 0$, $W = A$.
5. 5

   \end{itemize}

6. 6

   $R$ and $W$ are equal only at the kink $k=1$ (and even there the derivatives are not well defined). In no full region are $R$ and $W$ equal.

Answer structure / marking notes

Content note