Suppose that the production of 1 unit of computers requires 4 workers and 6 units of capital, while production of 1 unit of shoes requires 2 workers and 1 unit of capital. There are 200 workers and 200 units of capital in the economy. a. Solve for the amount of labour and capital used in each industry, and hence the output of each industry. Note that the labour market clearing condition is L = Lc + Ls, while the capital market clearing condition is K = Kc + Ks, where Lc, Ls, Kc, Ks are the total labour and capital used in computers and shoes, alc, als, akc, aks are the units of labour and capital required for one unit of computers and steel, Qc, Qs are the quantities of computers and shoes, and Lc = alcQc, Ls = alsQs, Kc = akcQc, Ks = aksQs. (8 marks) b. Draw a diagram with computers on the vertical axis and shoes on the horizontal axis, that summarises the results in part (a). (6 marks) c. Suppose there is a technological improvement in the manufacturing of computers, so that production of 1 unit of computers now requires 2 workers and 3 units of capital. Show in your diagram what happens to equilibrium wages and rental rates. (6 marks)
