The home country has 25 units of labor, the single factor of production. Labor can be used to produce good X and good Y. Good Y is produced by a competitive industry with constant returns to scale and a per unit labor requirement of 0.25. Good X is produced by a completive industry with increasing returns that are external to the firm. The per unit labor requirement for good X is 1/(Lx)^(1/2), with Lx representing total employment in producing good X.
- Sketch the industry level relationship between output and labor for the X sector and further use this sketch to make a PPF for the country.
-Distinguish between the cost of a unit of X if a firm expands its output, holding Lx constant, with the cost if all firms expand their outputs.
-If px/py = 1 on the world market, what production point will lead to maximum output for the home country? Explain why specializing in production of Y could be an equilibrium when all firms are competitive.
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