Reference no: EM133081246

Consider a small closed economy with two consumption goods: good 1 (meat) and good 2 (berries). There are two types of agents, h and g, and they have the same preferences over consumption, represented by the utility function: u(x1,x2)=lnx1+lnx2. However, there are twice as many type-h agents as type-g agents. The only factors of production are their labour. When a type-h agent chooses to spend a fraction α of his day producing meat and the rest producing berries then his output is (yh1,yh2)=(2α,2(1-α)). A type-g agent is more productive. When she chooses to spend a fraction β of her day producing meat and the rest producing berries then her output is (yg1,yg2)=(3β,12(1-β)). Normalise the price of one unit of berries (good 2) to 1, and let p be the price of one unit of meat (good 1).

Which of the following statements is true?

a. Equilibrium price must satisfy 1≤p≤4.

b. Equilibrium price must satisfy p<1.

c. Equilibrium price must satisfy p>4.

d. Equilibrium price p must be equal to 1 or must be equal to 4.