We consider a small open economy producing two goods i = 1 , 2 . These goods
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Question:
We consider a small open economy producing two goods i These goods
are produced using only one factor of production, labor. We will denote by ai
the quantity of labor required for the production of one unit of good i We will
denote by L the labor endowment of the country. The representative consumer
in the country has preferences given by the utility function
U C Calpha Log Calpha Log C
We let pi denote the price of good i and wi denote the wage rate in sector i
Derive the relationship determining the competitive supply of this economy, given by the vector Q Q Q of produced quantities of both
goods, as a function of prices p and p Represent graphically the relative supply schedule of good Q
Q
as a function of the relative price p
p
Determine the labor market clearing rate w.
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