Question

A country has only two inputs K and L and produces two goods X & Y. The country has 20 units of L and 10 units of K. Industry X is endowed with 15 units of L and 2 units of K and industry Y has the rest of L and K. This is an inefficient allocation. Put firm X’s origin on the left. Graph this endowment point as point 1, labeling the levels of L and K with L on the x-axis. Label the total endowment of K and L on the graph. Given that this is a Pareto inefficient allocation, graph and label the isoquants. Show the region that Pareto efficient exchange can lead to. Show the largest increase in X that can result from an efficient exchange. Label this point 2. Show the largest increase in Y that can result from an efficient exchange. Label this point 3. Show a Pareto efficient allocation that has an increase in X and Y. Label this point 4.

*Graph below the production possibilities frontier with X on the x axis. Graph points 1, 2, 3 and 4 and the origin points for industry X and Y.

Answer 1

X; y are two induttories and their Capital in 't 1) Given dato and labor in La Total amount of labocor da (L) = 2o units Total amount of Capital (k) = 10 units. the both x ay axis in a single plot Representing IL 7. (Capital) 20 Icuxl Ic3X Icar ICH Fay Ichy Ic34 I czy X a) Industay a has endowents: 15 units of L and a units of Industry. Y has remaining ie 0 5 units of Land 5 point shows the endow mete of a and y. units of k preto efficient points. It means are exhausted. 3) Shaded region indicati that all the gains of industries Indifference ccrue indicata pegle pareto insufficient posiet u CS Scanned with CamScanner