Start again with a relatively simple case. Suppose that a single type of output Y is
produced locally using labour L and capital K according to a technology captured by
production function Y = F(L, K) and sold on world markets at a fixed price p*. If
I assume constant returns to scale I can write output per head y as a function of capital
per head k, y = f (k) F(1, K/L). The return to labour is the wage w and the return to
capital is r and given profit maximising behaviour and constant returns to scale in
competitive conditions these will be equated to the values of the respective factors’
marginal products,