1. SF MODEL: Suppose we have two sectors: MANU and AG. Capital is specific to MANU and Land specific to AG. Labour is mobile. Prices are given.

a) What do we mean by Labour market equilibrium in this model? Show the equilibrium using the ‘Leontief Box’ diagram below and explain why it is the equilibrium.

b) Show/depict how to find total payments to labour, returns to the owner of capital and returns to owners of land.

c) How do we calculate GDP at equilibrium? Prove that the equilibrium maximizes GDP.

Two hydrogen-powered car manufacturers compete using advertisement campaigns. Firms can decide (simultaneously) the level of advertisement, which can be either High or Low. The number of potential customers in a month is 60 and the price of a car is £20,000. If a firm advertises more than its rival, it gets 75% of the customers. If both firms advertise the same level, each firm gets 50% of the customers. The cost of each car is £10,000 and it is only produced if a client demands it. High advertisement costs £100,000 per month and Low advertising has no cost. Firms have a monthly discount factor δ<1. For simplicity, you can express all monetary quantities in thousands (e.g. price of a car is 20, the cost of a car is 10, etc.)

a) Suppose that firms play this game every two months but during an infinite horizon of time. What is the minimum δ such that they can sustain a SPE where they use Low advertising?

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