Question

Suppose QF = min (LF/2 , KF), QC = min (Kc/2, LC), L = L* =...

Suppose QF = min (LF/2 , KF), QC = min (Kc/2, LC), L = L* = K = 1 and K* = 2

Which sector is labor intensive?

The answer is F, because LF / KF = 2 > 1/2 = LC / KC

How can I get the answer?


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Answer #1

As the production functions are L-shaped, the equilibrium/optimal solution will be at the corners of those L-curves, irrespective of the slope of isocost line. The corresponding graphs are also shown.

For the production function be , the corners will be at where or .

For the production function , the corners will be at where or .

Hence, sector F is labor intensive as the capital labor ratio is less there.

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