Economy A is producing two goods, x and y, using both capital and labour in the

Question

Economy A is producing two goods, x and y, using both capital and labour in the production of each good. The labour force can produce either 300 units of y or 100 unit of x or any linear combination of the two. The stock of capital can produce either 200 units of y or 400 units of x. The economy is initially producing (and consuming) 50 units of x. There is now an increase of 10% in the stock of capital without affecting the productivity of either capital or
labour. Therefore, the competitive price of x would fall from 4 y per x to ½ y per x. True or false? Explain in 250 words alongwith calculations

Explanation / Answer

for labour force 300y=100x i.e x=3y

for capital 200y=400x i.e y=2x or x=y/2 and for X (C/L) =4

initial production is 50 units of x.this can be produced by L/2 OR C/8

SINCE L/2=C/8 ; C/L =8/2=4 .Hence competitive price will fall from 4y per x to 1/2y per x

since there is 10 % increase in stock of capital without affecting the productivity of capital

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