Problem 1
Let's rewrite the story of Colleen and Bill in a way that highlights the role of relative price. Suppose that Bill and Colleen produce logs and bushels at the following rates:
Colleen | Bill | |
---|---|---|
bushels | 10 | 8 |
logs | 10 | 5 |
Suppose further that Bill and Colleen value bushels of food and logs equally, so that the price of one bushel equals the price of one log.
Problem 2
Assume that there are only two countries in the world: Home and Foreign. Assume that there are 300 workers in Home and 100 workers in Foreign.
In Home, 2 units of labor are needed to produce one unit of wine and 3 units of labor are needed to produce one unit of cloth. In Foreign, 5 units of labor are needed to produce one unit of wine and 4 units of labor are needed to produce one unit of cloth.
(labor per unit of output)
Home | Foreign | |
---|---|---|
wine | 2 | 5 |
cloth | 3 | 4 |
Assume that each country's utility is given by the Cobb-Douglas function:
Note that the demand functions associated with such a utility function are given by:
where is money income, is the price of cloth and is the price of wine.
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