1. Consider a country in which there are 2 sectors called Sector 1 and Sector 2. The production functions and the marginal products in the two sectors are:
Y1=(L1)^0.5 and MPL1=0.5/(L1)^0.5
Y2=(L2)^0.5 and MPL2=0.5/(L2)^0.5
where L1 is the number of workers employed in Sector 1 and L2 is the number of workers employedin Sector 2. The total number of workers in the economy is 1,000. The only difference between the sectors is that in Sector 1 workers are paid their marginal products, whereas in Sector 2 they are paid their average products. Workers move freely between sectors so that the wages are equal.
(a) Calculate how many workers will work in each sector.
(b) Calculate the optimal number of workers in each sector.
(c) Use your answers from (a) and (b) to answer the following question: compared to the optimalallocation of workers, what sector has too many workers, and what sector has too small employment?
2. Which of 5 types of inefficiency described in do you think is most economically significant in the country that you know best. Explain why and give examples.