Question

Consider two countries, H and L. In country H wages are high and given by WH​=2 while WL​=1 in country L where the wage is low. Both countries face the same rate of interest given by R=1 which is the price of capital. Moreover, both countries have the same production technology: Y=min{K,L} Finally, the production level is the same in both countries, Y=6. A scientist finds an alternative way to produce Y=6. But this technology requires K=9 and L=4 as inputs.

a) If you are country L, would you use this new technology? If yes, how much would you pay at most to acquire this technology?

Answer 1

Country L should use the new technology because it requires fewer inputs and would pay at most the difference in costs to acquire it.

Step-by-step explanation:

Country L should use the new technology because it requires fewer inputs of both capital and labor compared to the current technology. The new technology uses K=9 and L=4 as inputs, while the current technology uses the same level of production (Y=6) but with lower wages and capital. Country L would pay at most the difference in costs between the two technologies to acquire the new technology.