HW10-REV-solutions

# HW10-REV-solutions - Suggested Solutions for HW #10 Winter...

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Suggested Solutions for HW #10 Winter 2006 Econ 11 Professor Zame Question 1 (a) Variables Prices: p L ,p B G Consumption goods: B ,G Production Choices: B out out ,L B G (b) Equations Consumer’s optimize: B = 4 5 ( p L p B ) G = 1 5 ( p L p G ) Zero-pro f t conditions: π B = p B B out p L L B =0 =5 p B L B p L L B 5 p B = p L p L p B π G = p G G out p L L G p G L G p L L G 5 p G = p L p L p G Production Functions: B out L B G out L G 1

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Market Clearing: B out = B G out = G L B + L G =1 (c) Equilibrium Normalize prices such that p B = / 1 . Then from the zero-pro f t conditions, we have p L =5 and p G . From the consumer’s optimization equations, we get B =4 and G . Then from the f rst two market clearing conditions, we get B out and G out = 1 . From the production functions, we get L B = 4 5 and L B = 1 5 .I ti se a s yt o verify that the labor market also clears. Question 2 (a) Variables Prices: p L ,p B G Consumption goods: B ,G Production Choices: B out out ,L B G (b) Equations Consumer’s optimize: B = 3 5 ( p L p B ) G = 2 5 ( p L p G ) Zero-pro f t conditions: π B = p B B out p L L B =0 0 p B L B p L L B 10 p B = p L p L p B 0 2
π G = p G G out p L L G =0 =2 p G L G p L L G 2 p G = p L p L p G Production Functions: B out =1 0 L B G out L G Market Clearing: B out = B G out = G L B + L G (c) Equilibrium Normalize prices such that p B = / 1 . Then from the zero-pro f t conditions, we have p L =10 and p G =5 . From the consumer’s optimization equations, we get B =6 and G = 4 5 . Then from the f rst two market clearing conditions, we get B out and G out = 4 5 . From the production functions, we get L B = 3 5 and L B = 2 5 .I ti se a s yt o verify that the labor market also clears. Question 3 (a) PPF of Country A: Production Functions: B L B L B = B 5 G L G L G = G 5 Total Labor Supply is 1 . 3

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L B + L G =1 B 5 + G 5 B + G =5 PPF of Country A: B + G PPF of Country B: Production Functions: B 0 L B L B = B 10 G =2 L G L G = G 2 Total Labor Supply is 1 . L B + L G B 10 + G 2 B +5 G 0 PPF of Country B: B G =10 4
Conclusion: Country A specializes in G and produces no B. Country B specializes in B and produces no G.

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## This note was uploaded on 04/01/2010 for the course ECON Econ 11 taught by Professor Mcdevitt during the Fall '07 term at UCLA.

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HW10-REV-solutions - Suggested Solutions for HW #10 Winter...

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