2x2 Pure Production Economy
There is no consumption in this example. There are 2 firms (firm 1 and firm 2) that own a certain
endowment of 2 production factors (work L and capital K). They can Exchange the production
factors in order to maximize their own production.
The initial endowments are as follow
̅
̅
̅
̅
,
and the production functions of the two firms are
.
Each firm faces a budget constraint that come from the exchange of the own factors
̅
̅
̅
̅
The relative price of labour ( ) is determined by the factors market, while the price of capital is
set to unity (
).
Determine the equilibrium price of labour ( ) and the optimal quantities of factors for the 2 firms
after the exchanges took place (
).
A: