Figure 2.8 is an edgeworth-bowley diagram Suppose the production function* for c

Question

Figure 2.8 is an edgeworth-bowley diagram

Suppose the production function* for commodities X and Kara identical How will this affect the shape of the efficiency locus? What will the production possibility curve look like for the case of (a) constant returns to scale and (6) increasing returns to scale. How will the efficiency loci differ for these two cases? 2. Suppose that the total available quantity of labor increases and that the available quantity of capital decreases. How will this affect the shape and position of the production possibility curve? 8. In terms of Fig. 2.8, show that the equilibrium wage-rental ratio increases as one moves from Ox to Oy along the efficiency locus.

Explanation / Answer

Ans 1)

The efficient allocations will occur where the isoquants are tangent to one another.With identical ppf the tangency points at each level of output would give efficient allocations. Thus, the efficiency locus would be the diagonal line of the Edgeworth Box

If both goods have constant returns to scale production functions the production possibility frontier will be linear.

In case of increasing returns the production possibility frontier will be convex.The transferiing of one unit of labor from Y to X will decrease the output of Y by 1 unit but increase the output of X by more than 1 unit.

For CES the ppf will be linear whereas for IES the ppf will be convex.

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