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Question: Consider two economies with identical production functions Y = K^alpha L^I - alpha where alpha = ...

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Show transcribed image text Consider two economies with identical production functions Y = K^alpha L^I – alpha where alpha = 1/4. Economy U has 100 units of K and 100 units of L; Economy V has 100 units of K and 50 units of L. (a) How much are the factor prices (MPK and MPL) in each economy when factors are immobile? (b) Now suppose K(but not L) is free to move. In which direction will the flows take place, and when will they cease? (c) Now suppose L(but not K) is free to move. In which direction will the flows take place, and when will they cease? (d) Compare and contrast the equilibria in (b) and (c) above.

Consider two economies with identical production functions Y = K^alpha L^I – alpha where alpha = 1/4. Economy U has 100 units of K and 100 units of L; Economy V has 100 units of K and 50 units of L. (a) How much are the factor prices (MPK and MPL) in each economy when factors are immobile? (b) Now suppose K(but not L) is free to move. In which direction will the flows take place, and when will they cease? (c) Now suppose L(but not K) is free to move. In which direction will the flows take place, and when will they cease? (d) Compare and contrast the equilibria in (b) and (c) above.