Consider a society consisting of just a farmer and a tailor. The farmer has 10 units of food but no clothing. The tailor has 20 units of clothing but no food. Suppose each has the utility function U = F ? C. The price of clothing is always $1. If the price of food is $3, does a competitive equilibrium exist? If not, what will happen to the price of food?
What will be an ideal response?
If the price of food is $3, the farmer's initial wealth is $30. His budget line is 30 = 3F + C. His budget line is tangent to an indifference curve when C/F = 3. Substituting yields 30 = 6F or F = 5 and C = 15. The tailor's budget line is 20 = 3F + C. His budget line is tangent to an indifference curve when C/F = 3. Substituting yields 20 = 6F or F = 3.33 and C = 10. In total 8.33 units of food and 25 units of clothing are demanded. There is excess demand for clothing and excess supply of food. The price of food will fall. When the price of food is $2, both markets clear.
You might also like to view...
Inflation leads to bracket creep, which forces taxpayers to pay a larger percentage of their income in taxes, when
(a) Changes in the real purchasing power of their income do not keep pace with inflation. (b) Changes in the real purchasing power of their income keep pace with inflation. (c) Income tax codes change quickly as inflation emerges, impacting real purchasing power. (d) Income tax codes increase without taxpayer knowledge, forcing them to pay higher taxes than anticipated.
Suppose Tammy grew up on a farm and is very good at plowing. In addition suppose she is a popular country singer who earns $4,000 per performance. If her husband Bob can plow (but not as well as Tammy) but he can't carry a tune, then it would be most efficient if
a. Tammy did both the plowing and the singing. b. Tammy specialized in plowing and Bob in singing. c. Bob did both the plowing and singing. d. Tammy specialized in singing and Bob in plowing. e. They both plowed and sang.