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 Lof 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 lis y = L1.and good 2 has production function y = vKL. What is the equilibrium allocation of labour between sectors (expressed as a function of goods' prices and endowments)? O a. L =L-(²K,L2 = (*K. O b. L = K,L=L-(K. O. L = 0, L= L. O d. L = L, L2 = 0. %3D
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 Lof 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 lis y = L1.and good 2 has production function y = vKL. What is the equilibrium allocation of labour between sectors (expressed as a function of goods' prices and endowments)? O a. L =L-(²K,L2 = (*K. O b. L = K,L=L-(K. O. L = 0, L= L. O d. L = L, L2 = 0. %3D
Chapter1: Making Economics Decisions
Section: Chapter Questions
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A small open economy produces two goods, 1 and 2, at output levels yi, 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 y = L1, and good 2 has production function y2 = VKL.
What is the equilibrium allocation of labour between sectors (expressed as a function of goods' prices and endowments)?
O a. L = L-)°K,L2 = (*K.
O b. L= (K,L =L-(K.
O c. L = 0, L = L.
O d. L = L, L2 = 0.
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?
The first country produces y2 = K and the second country produces y = K'. Therefore, the first country exports good 1 and
imports good 2.
O b
The first country produces y2
L
EK 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 yn = K and the second country produces y, = K'. Therefore, the first country imports good 1 and
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
good 2 and exports good 1.
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