Question

Consider Home produces computers(C) and food(F) using capital(C) and labor(L). The unit factor requirements are fixed and given by: aLC = 2, aKC = 6, aLF = 3, aKF = 4. The total labor supply is 900 and the total capital stock is 1,500.

a. Which good is relatively labor intensive? Which good is relatively capital intensive?

b. Derive and draw the PPF of this country. At which point on the PPF are both factors fully employed?

c. Suppose Home produces at the point you find in b. According to Rybczynski theorem, what happens to the output mix if the total labor supply increases.

d. Suppose autarky prices are given by PC = 10, PF = 10. At which point on the PPF does Home produce?

Answer 1

Solution:-

GIven data is,

,

,

and

The total labor supply is 900 and

the total capital stock is 1,500.

a)

Food is labor intensive because

computers are capital intensive because

b)

c)

According to Rybczynski theorem,when labour supply increases in order to keep the relative prices of goods home,the labor intensive output will increase,while the capital intensive output will fall.

d)

when ,.

i.e.,

then home should be produce at a point, where the slope of tangent on PPF=1