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Output can be labeled as either consumables or capital goods

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In our model, output can be labeled as either consumables or capital goods. Economist call this a one-sector production function.

1. Why does the price of a unit of consumables always equal the price of a unit of capital in this model? What would happen if the price of consumables exceeded the price of capital goods, or vice versa?

2. Suppose that everyone wants to undertake negative gross investment; that is, everyone wants to resell old capital on the commodity market. Can the price of capital goods fall below the price of consumables in this case?

3. Consider a "two-sector model," in which different production functions apply to consumables and capital goods. Would the price of a unit of consumables always equal to the price of a unit of capital goods in this model?

Reference no: EM133246026

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