1. Consider the following Country with 100 inhabitants producing wheat and cloths. The Marginal Products of...

1. Consider the following Country with 100 inhabitants producing wheat and cloths. The Marginal Products of Labor (MPL) in the country are as follows. Wheat 6 Bushels per person per day Cloths 2 Yards per person per day 1. Derive a relationship between ratio of MPLs and ratio of Prices of Wheat and Cloths 2.What is the price of cloths? 3.To determine the production and consumption of wheat and cloths in the country what more information do you require? 4. Use a diagram to show production and consumption of wheat and cloths in the country.

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Expert Solution

The Production possibility frontier (PPF) is shown below. With 100 workers, total production of wheat is 6*100 = 600 bushels per day and total production of cloths is 2*100 = 200 yards of cloths, if all the 100 workers are allocated in one industry at a time. Production of wheat and cloths if half of the population is in wheat and the other half in cloths: 50*6 = 300 bushels of wheat and 2*50 = 100 yards of cloths.

1) The relationship between ratio of MPLs and ratio of Prices of Wheat and Cloths is given by:

Wage rate in wheat production = wage rate in cloth production

MPLW x PW = MPLC x PC

PC/PW = MPLW/MPLC

Hence PC/PW = 6/2 = 3.

2) The price of cloths is three times the price of wheat. This implies that 1 yard of cloth is priced at 3 bushels of wheat.

3) To determine the production and consumption of wheat and cloths in the country information related to the community indiiference curve, that relates marginal rate of substitution with the marginal rate of transformation, is required.

4) Assuming half of the population is working in each sector, the production and consumption of wheat and cloths in the country will be equal. This is shown below

Rahul Sunny answered 1 year ago

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