Think of an economy in which there are two produced goods (quantities of which are denoted by x and y), two firms, and one factor (quantities of which are denoted by z). Each produced good and factor is bought and sold in a seperate market. The two produced goods markets each contain one of the two firms as sole supplier. Both firms purchase quantities of the factor in the same factor market as the only demanders. There is only one consumer who is the sole demander in each of the produced goods markets and the sole supplier in the factor market
The Correct Answer and Explanation is:
In the described economy, we have a market structure involving two produced goods, two firms, and one factor. Here’s a breakdown of the roles of each economic agent:
- Produced Goods and Firms:
- The economy produces two goods, denoted by xxx and yyy. These goods are produced by two firms, each supplying one of the goods.
- Firm 1 is the sole supplier of good xxx, while Firm 2 is the sole supplier of good yyy. Each firm is responsible for the production and supply of one specific good in the economy.
- Factor Market:
- There is one factor (denoted by zzz) that is used in the production of both goods. This factor is purchased by both firms in the factor market.
- The factor market operates under the assumption that the firms are the only demanders of the factor. Therefore, each firm buys a certain quantity of the factor in order to produce its respective good.
- Consumer:
- There is only one consumer in the economy. This consumer plays a dual role: they are the sole demander in the goods markets and the sole supplier in the factor market.
- As a demander in the goods markets, the consumer purchases quantities of both goods xxx and yyy.
- As a supplier in the factor market, the consumer provides the factor zzz to the firms. The consumer’s endowment or supply of zzz is the input that both firms need in order to produce the goods.
- Market Equilibrium:
- In each market (goods and factor markets), there is a balance between demand and supply. The prices of the goods and the factor are determined by the interaction of demand (from the consumer) and supply (from the firms and factor market).
- For the economy to function efficiently, the quantities of the goods and the factor must be determined in such a way that the total demand matches the total supply in each market.
In summary, the economy involves a simple structure where firms produce goods using a single factor, and there is one consumer who demands the goods and supplies the factor. This setup creates interdependencies between the markets, and equilibrium is achieved when the quantities of goods and factors produced and consumed balance.
