# What are the equilibrium wage and rental rates?

Gates and Trumka live in the same country. Gates is endowed with 100 units of capital and none of la Show more Gates and Trumka live in the same country. Gates is endowed with 100 units of capital and none of labor. Trumka has no capital but 100 units of labor. Together they can produce two goods beer and pretzels. Fixed amounts of each factor are required in each production process as follows: 1 Beer = 2 capital + 3 labor and 1 pretzel = 3 capital + 2 labor. Suppose that Gates and Trumka have similar tastes. Their utility functions can be represented as U = BZ where B and Z are their levels of consumption of beer and pretzels respectively. Neither individual derives any utility from consuming his factor endowment so each is willing to supply all of his endowment at any positive price. Let p be the price of pretzels in terms of beer (beer is the unit of account since it is the most liquid asset). Both Gates and Trumka act as price takers in all markets. 1. If either individual has income Y and the price of pretzels is p how much beer does he consume? How many pretzels? 2. What is the price of pretzels in the autarky equilibrium? How much of each good is produced? What are the equilibrium wage and rental rates? How much of each good does each individual consume? What are the utility levels achieved by Gates and Trumka respectively? Show less

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