An economy contains two agents (A and B), with some given utility functions, each endowed with...

 

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An economy contains two agents (A and B), with some given utility functions, each endowed with some amount of capital K' and labor L for i = (A, B). The total factors of production (capital and labor) in this economy are given by K = K + K" and E = %3D L + L", respectively. The two goods X and Y are produced in this economy according to the following production functions: X = F(K, L) and Y = G(K, L). - Part A: Suppose you are the chief economist in the economy described above and are interested in creating policies to improve efficiency. You observe that despite increases in capital and labor, there is not a proportional increase in the output of goods X and Y. As you are creating your model with production functions to describe this economy, what could account for this phenomenon? Hint: Assume the production functions in this economy are Cobb-Douglas. An economy contains two agents (A and B), with some given utility functions, each endowed with some amount of capital K' and labor L for i = (A, B). The total factors of production (capital and labor) in this economy are given by K = K + K" and E = %3D L + L", respectively. The two goods X and Y are produced in this economy according to the following production functions: X = F(K, L) and Y = G(K, L). - Part A: Suppose you are the chief economist in the economy described above and are interested in creating policies to improve efficiency. You observe that despite increases in capital and labor, there is not a proportional increase in the output of goods X and Y. As you are creating your model with production functions to describe this economy, what could account for this phenomenon? Hint: Assume the production functions in this economy are Cobb-Douglas.

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If labour and capital is growing but output is not growing proportionaly than the production functi... View the full answer