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Consider a trading country, Home, producing Cars and Food with two factors of production, namely Capital (K) and Labour (L). The fixed unit input-output requirements
Consider a trading country, Home, producing Cars and Food with two factors of production, namely Capital (K) and Labour (L). The fixed unit input-output requirements for production in two sectors are as follows: 5 units of Capital and 2 units of Labour are needed to produce 1 unit of Cars, while 1 unit of Capital and 4 units of Labour are needed to produce 1 unit of Food. The capital and labour endowments for Home are K = 150 and L = 150. Capital and Labour are perfectly mobile across the two production sectors but are immobile across countries. Consumers have preferences described by the utility function U(C,F)=CF, where C and F are the demand quantities of Cars and Food, respectively. These consumer preferences imply the following relative demand equation: Po / PF = F/C. Free international trade occurs at world prices Po = 2 and PF = 1.2.Answer the following questions. All numerical answers must be accurate to two decimal places. Assuming full employment of labour and capital, how many units of Cars are produced? Calculate the equilibrium wage rate for labour. Calculate the real wage rate expressed in units of Cars. How many units of Food do consumers demand? How many units of Food does a labourer earning the equilibrium wage demand
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