Euler Theory Case Study

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1. Wicksteed made a significant contribution to value theory during the marginal utility revolution. This contribution was the “Exhaustion of the product” which we derived in class. Explain the importance of this contribution. Explain the significance of the Euler theorem and the assumption of constant returns to scale in deriving the solution. In what ways is this contribution similar to Marx's Transformation Problem, in what ways is it different? Wicksteed was one of the first economists introduced the operation of constant returns to scale in production and applied the Euler Theory to prove the product exhaustion problem. “The Product Exhaustion Theorem states that with constant return to scale and marginal- cost, the value of output equals the value of inputs, their marginal product. If each factor is rewarded equal to its marginal product, the total product, the total product should be disposed of without any surplus or deficit.” Since Wicksteed applied the Euler’s Theorem this showed that if all factors are paid equal to their marginal products then the total product will be just exactly exhausted. “Euler’s work on homogeneous function of the first degree, applied in the working theory of factor pricing and income distribution. P. Wicksteed and Wicksell argued that all the variable inputs will be paid according to their marginal product” (Blaug 1997). The simplest way to illustrate the theorem is by using a two-factor model. “The factor inputs such as labor (L) and capital (K) are each paid a price (PL and PK, respectively) which will be equal to the value of its marginal product (MPL and MPK, respectively).” “If firms operating under perfect competition want to optimize their input level by selecting the input quantities... ... middle of paper ... ...onomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. These decisions are often complex, involving multiple parties as well as strategic and technological considerations. The efficiency of those decisions not only depends on managerial talent but also hinges on the existence of sound institutions that provide a proper transactional framework. Failure along this dimension can have severe macroeconomic consequences once it interacts with the process of creative destruction” (Scoar, 5). Animal spirits is a term coined by the economist John Maynard Keynes, who was a British economist. It is to emphasize the important of confidence and the instinct of businessmen on their future business. Keynes monetary theory is about inadequate profit levels and its risk involving investment decisions.

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