A small open economy produces two goods, 1 and 2, at output levels y;, i = 1, 2. Output prices are set on world markets and denoted p1, P2. The economy is endowed with quantities L of labour and K of capital. Capital is used in sector 2 only, and labour is used in both sectors, L denoting the use of labour in sector i = 1, 2. The wage rate and the capital rental rate are w and r, respectively. The production function for good 1 is y1 = L1 , and good 2 has production function y2 = VKL. Consider the economy form Question 4. Suppose that there is another economy, which is identical to the first one but has a greater endowmen of capital K' > K.what is the output of good 2 in either economy? Assuming that consumers in both countries are identical, what is the pattern of trade between those two countries? O a. The first country produces y2 = K and the second country produces y½ = K'. Therefore, the first country exports good 1 and imports good 2. O b. The first country produces y2 = L – K and the second country produces y, = L - K'. Therefore, the first country exports good 2 and imports good 1. O c. The first country produces y2 = K and the second country produces y, = K'. Therefore, the first country imports good 1 an %3D 2p exports good 2. O d. The first country produces y2 = L – K and the second country produces y½ = L – K'. Therefore, the first country imports %3D 2p 2p. good 2 and exports good 1.
A small open economy produces two goods, 1 and 2, at output levels y;, i = 1, 2. Output prices are set on world markets and denoted p1, P2. The economy is endowed with quantities L of labour and K of capital. Capital is used in sector 2 only, and labour is used in both sectors, L denoting the use of labour in sector i = 1, 2. The wage rate and the capital rental rate are w and r, respectively. The production function for good 1 is y1 = L1 , and good 2 has production function y2 = VKL. Consider the economy form Question 4. Suppose that there is another economy, which is identical to the first one but has a greater endowmen of capital K' > K.what is the output of good 2 in either economy? Assuming that consumers in both countries are identical, what is the pattern of trade between those two countries? O a. The first country produces y2 = K and the second country produces y½ = K'. Therefore, the first country exports good 1 and imports good 2. O b. The first country produces y2 = L – K and the second country produces y, = L - K'. Therefore, the first country exports good 2 and imports good 1. O c. The first country produces y2 = K and the second country produces y, = K'. Therefore, the first country imports good 1 an %3D 2p exports good 2. O d. The first country produces y2 = L – K and the second country produces y½ = L – K'. Therefore, the first country imports %3D 2p 2p. good 2 and exports good 1.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:QUESTION 4
A small open economy produces two goods, 1 and 2, at output levels y;, i = 1, 2. Output prices are set on world markets and denoted p1 , P2.
The economy is endowed with quantities L of labour and K of capital. Capital is used in sector 2 only, and labour is used in both sectors, L;
denoting the use of labour in sector i = 1, 2. The wage rate and the capital rental rate are w and r, respectively. The production function for good
l is y1 = L1 , and good 2 has production function y2 = VKL.
Consider the economy form Question 4. Suppose that there is another economy, which is identical to the first one but has a greater endowment
of capital K' > K.what is the output of good 2 in either economy? Assuming that consumers in both countries are identical, what is the
pattern of trade between those two countries?
O a. The first country produces y2 = K and the second country produces y½ = K'. Therefore, the first country exports good 1 and
а.
2p
imports good 2.
O b. The first country produces y2
L-
2p
K and the second country produces y, = L - K'. Therefore, the first country exports
%3D
2p
good 2 and imports good 1.
O c. The first country produces y2 = K and the second country produces y, = K'. Therefore, the first country imports good 1 and
P
2p
2p
exports good 2.
O d. The first country produces y2
L-K and the second country produces y = L - K'. Therefore, the first country imports
2p
%3D
2p,
good 2 and exports good 1.
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