a) Assume the economy produces two goods, cloth and food. Cloth production is considered a labor...

 

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a) Assume the economy produces two goods, cloth and food. Cloth production is considered a labor intensive sector, whereas food production is considered a capital intensive sector. The labor cost is denoted by "w" and the capital cost by "r", which are known as factor prices. Goods prices are denoted by P for cloth and P, for food. Illustrate graphically using production possibilities how increases in Labor affect the allocation of factors, L and K, across sectors and changes in output produced. C b) In what direction is the expansion of production possibilities biased? a) Assume the economy produces two goods, cloth and food. Cloth production is considered a labor intensive sector, whereas food production is considered a capital intensive sector. The labor cost is denoted by "w" and the capital cost by "r", which are known as factor prices. Goods prices are denoted by P for cloth and P, for food. Illustrate graphically using production possibilities how increases in Labor affect the allocation of factors, L and K, across sectors and changes in output produced. C b) In what direction is the expansion of production possibilities biased?

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In the above graph vertical axis measure the cloth and horizontal axis represents the food when the ... View the full answer