A country is endowed with 15 units of capital, 20 acres of land and 100 laborers

Question

A country is endowed with 15 units of capital, 20 acres of land and 100 laborers. Capital and land are specific to the manufacturing and food sectors, respectively. Let the price of food be fixed at 1, and suppose that, in autarky, the price of manufactures is 2, while in free trade, it is 3.5. The marginal product of labor is given by the following functions:

MPLM = 80-2LM

MPLF = 140-LF

Questions:

1. Which good does the country export? Explain.

2. What fraction of the labor force is employed in manufacturing in autarky and in free trade?

3. Suppose there is a laborer who spends half her wage on food and half on manufactures. How much of each good will she consume in autarky and in free trade?

4. How much of each good will be produced, in this country, in autarky and free trade?

5. What is the percentage change in the real income of capital owners in terms of each good, as the country moves from autarky to free trade?

6. What is the percentage change in the real income of land owners in terms of each good, as the country moves from autarky to free trade?

Explanation / Answer

an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]

There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.