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Consider a small economy producing two goods, clothing and food. The clothing industry uses capital (K) and labor (LC) as inputs, while the food industry
Consider a small economy producing two goods, clothing and food. The clothing industry uses capital (K) and labor (LC) as inputs, while the food industry uses land (La) and labor (LF ) as factors of production. The production technologies for the two industries (QC for clothing QF for food) are given by QC = K^(1/4)LC^(3/4) and QF = La^(1/2)LF^(1/2). Also, the country is endowed with 59.2593 units of capital (K), 500 units of labor, and 50 units of land (La). Finally, the utility function of the representative consumer is given by U(CC, CF ) = CC^(1/2)CF^(1/2). Starting from the free trade equilibrium introduce free capital flows to the model. In particular, assume that the small open economy can borrow or lend capital to and from the international capital market at the fixed real interest rate, (r/pf) of 0.1. question 1: Determine LC, LF and the amount of capital (K) used in production of clothing with free trade plus free capital flows. question 2: Calculate production and consumption levels in the free trade and capital flows equilibrium
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