Consider the “Robinson Crusoe” economy with two markets - product market and labor market. Assume the...

Consider the “Robinson Crusoe” economy with two markets - product market and labor market. Assume the utility function of the consumer is given by ? = ?(?, ?), where ? denotes consumption and ? stands for leisure, and the production technology is given by ? = ?(?), where ? is output and ? denotes labour input. Furthermore, assume the price of the consumer good to be equal to one, and the price of labour equal to wage rate, ?, and that the consumer and producer are price-takers.

Discuss how the decentralised decision making is coordinated in this economy and derive the analytical condition that results in a Pareto-efficient exchange.

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Rahul Sunny answered 1 year ago

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