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Consider the 2x2x2 model where firms use capital and labour to produce goods 1 and 2 which are then distributed between Andy and Bob. Consider
Consider the 2x2x2 model where firms use capital and labour to produce goods 1 and 2 which are then distributed between Andy and Bob. Consider the following parameters: We have 10 units of Capital and 11 units of Labour. Good 1 is produced by the technology x1 = f1 (K1, L1) = min {K1,L1}. Good 2 is produced by the technology x2 = f2 (K2, L2) = K2 L2. Andy only values good 1 and so has utility function: uA (xA1, xA2) = xA1 Bob has utility function: uB (xB1, xB2) = xB1 xB2 3 For the following questions you can answer mathematically or diagramati- cally or a combination of the two. a) Describe how Capital and Labour are distributed at technologically ef- ficient allocations. Find the production possibility frontier x2 (x1) (14 marks)
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