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You Live in a World Where the Marginal Rate of Substitution

question 34

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You live in a world where the marginal rate of substitution of food for clothing is two and the price ratio between food and clothing is one. Your world also has labor and capital that has marginal products respectively of two and five. The price of capital is ten and the price of labor is 8. Finally, your world can transform two units of food into one unit of clothing or vice versa. Assuming that all the conditions of general equilibrium are present, what will happen in the various sectors of the economy to bring about general equilibrium?


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