Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 3 Consider a production economy with two agents, Bunter and Quelch, and a factory. Each agent is endowed with one unit of labor, and

image text in transcribed
Question 3 Consider a production economy with two agents, Bunter and Quelch, and a factory. Each agent is endowed with one unit of labor, and the factory uses labor to produce Brawndo (good 1) and Soma (good 2) according to some production function. Both Bunter and Quelch only derive utility from the consumption of Brawndo and Soma, but not from labor, and each of them is entitled to half of the factory's profits. Denote by (21, X2) the bundle of Brawndo and Soma, respectively, consumed by Bunter. Similarly, denote by (y1, y2) the amount of Brawndo and Soma consumed by Quelch. Let Bunter's utility function be u(X1, 12) = -1 - 1, and let Quelch's utility function be u(y1, y2) = -1 - 1 y1 y2 1. Suppose the factory can produce Vai 3 units of good 1 when z1 units of labor are used as input, and 2vz2 units of good 2 when z2 units of labor are used as input. Compute the Walrasian equilibrium of this economy and the utility of Bunter and Quelch. 2. Suppose now that the factory has become more efficient and can produce z1 units of good 1 when z1 units of labor are used as input, and up to z2 units of good 2 when z2 units of labor are used as input. Bunter and Quelch are concerned that this will make them worse off as less labor is required to make a certain level of output than before. Compute the new Walrasian equilibrium of this economy and the utility of Bunter and Quelch, and compare it with the answer obtained from (a). What is the new profit of the factory, and how does it compare with (a)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Commerce And Coalitions How Trade Affects Domestic Political Alignments

Authors: Ronald Rogowski

1st Edition

0691219435, 9780691219431

More Books

Students also viewed these Economics questions