Suppose two individuals A and B each have 10 hours of labour to devote to producing either ice cream (x) or chicken soup (y). A’s utility function is given by
whereas B’s utility function is given by
The individuals do not care whether they produce x or y, and the production function for each good is given by
where l is the total labour devoted to production of each good.
a. What must the price ratio, px /py be?
b. Given this price ratio, how much x and y will A and B demand?
c. How should labour be allocated between x and y to satisfy the demand calculated in part (b)?