Group task 7.1

There are 200 units of labor and 100 units of capital available for production in the economy. These production factors are used to produce food and cloth. Production is subject to constant returns, according to the following productivity coefficients (how many units of a given factor are required to produce one unit of the given product).

	Food	Cloth
Lab	5	2
Capital	1	2

What is the best (most efficient) allocation of labor and capital between the two sectors / products?

Assume that we need to allocate resources in a way that an equal amount of cloth and food is produced! How much labor and capital is used then in the two sectors?

Think about the first exercise: what factor and goods prices can work with that allocation?

Think about the second exercise: what would happen with prices in that case?

Let's define the utility function of consumers (C is for cloth, F is for food):

U = 10 C ^ 0.4 F ^ 0.6

Now: can we say something about prices?