Donald and Hillary each have 10 hours of labor (L) that can be used to produce...

Donald and Hillary each have 10 hours of labor (L) that can be used to produce candy (C) and soup (S). Donald’s utility function is given by: Ud = C^0.3 S^0.7 and Hillary’s is: UH = C^0.5S^0.5. Neither have preferences over production. Production of each good is determined by: C = 2Lc and S = 3Ls.

(a) What must be the price ratio pc/ps be?

(b) Set the wage equal to $1. Given the above price ratio, how much C and S will Donald and Hillary demand?

(c) How should labor be allocated between the two goods to meet the demand calculated in part b)?

Expert Solution

Rahul Sunny answered 1 year ago

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