Question: N=0, please help me walk through this problem step by step Problem 5 David is very bored and decides to create a mini economy in

N=0, please help me walk through this problem step by step

N=0, please help me walk through this problem step by step Problem

Problem 5 David is very bored and decides to create a mini economy in his bedroom. He creates a profit maximising company called Bowie Inc. which produces water balloons (W) and slingshots (S) using the labour that David himself provides to the company for an hourly wage which can be normalised to 1. Bowie Inc. produces water balloons and slingshots according to the production functions WB = VLwand SB = VLs, where Lwand LB are the labour demanded for the production of each good. Bowie Inc. is of course owned by David so whatever profits the company makes David can use them to buy water balloons and slingshots at prices pw and ps. David's preferences over these goods are represented by the utility function U(SD, WD) = \\(WD.SD). David has plenty of time in his hands and he has a total of 20(N+1) hours he can sell to Bowie Inc. a) Find David's demand for water balloons and slingshots. b) Find Bowie Inc.'s optimal demand of labour for the production of water balloons and for the production of slingshots. Find its optimal supply of these goods and its profits. c) Find the prices ps and pw that clear all markets (for water balloons, slingshots and the labour market). Find the resulting equilibrium allocation. d) With slingshots in the horizontal axis, find the mathematical expression for the PPF and show that at the equilibrium allocation you found in (c) the MRPT is equal (in absolute value) to the ratio of equilibrium prices and David's MRS at the equilibrium allocation

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!