Kite land (K) and Air land (A) are two economies with total labour of 50 and 150,
Question:
Kite land (K) and Air land (A) are two economies with total labour of 50 and 150, respectively. The tastes and preferences of these economies, over the two goods X and Y, are the same and are given by the utility function U(X, Y)= X^0.6 Y^0.4 . In Kite land, one unit of labour can produce 3 units of Good X; while it can produce 5 units in Air land. Similarly, one unit of labour can produce 4 units of Good Y in Kite land, whereas it can produce 8 units in Air land. Given this information, answer the following questions:
(i) What is the opportunity cost of producing X in terms of Y in Kite land and Air land?
(ii) What are the production possibility frontiers for the two countries?
(iii) Under the conditions of free trade, what is the equilibrium relative price?
(iv) Discuss whether the economies would go for complete specialization?
(v) If there was complete specialization, what would have been the relative output of X to Y produced?
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey