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Unformatted text preview: ECO 310, Fall 2007 Problem Set 6: General Equilibrium, Monopoly Due in class on December 4 Question 1 Consider a small country with two firms. Firm 1 produces x = min( k x , l x ) units of good x ; firm 2 produces y = p k y l y units of good y . This country has 10 units of capital and 25 units of labor. (a) Describe the production possibility frontier of this country. (b) Compute the rate of production transformation. Suppose that outputs x and y are traded internationally at prices $5 and $4, respectively, but the firms must buy capital through domestic factor markets at rental price $ v and labor at wage $ w . (c) Compute firm 1s input demands and output supply as functions of v and w . (Hints: First compute the cost minimizing inputs k x and l x for given v , w , and x . Then calculate the profit maximizing output x for given v and w . Because the production function exhibits constant returns to scale, there may not exist a solution to the profit maximization problem, or, even if exists, the solution may not be uniquely determined.)or, even if exists, the solution may not be uniquely determined....
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This note was uploaded on 04/07/2008 for the course ECO 310 taught by Professor Stephene.morris during the Fall '08 term at Princeton.
- Fall '08