What is the range for the relative price of cloth such that the economy produces both cloth and food? From to . Which good is produced if the relative price is higher than this range?

The answer is explained in detail below

Explanation:

Labor, L = 2000; Capital, K = 3000  

Labour constraint,

Capital constraint ,

 

Solving the equation further, we get

The range for the relative price of cloth such that the economy produces both cloth and food is  2/3 and 2Low cloth production → economy will use relatively more labor to  produce cloth → opportunity cost of cloth is 2/3rd units of food. High cloth  production → economy dips on labor → taking capital away from food  production → raising opportunity cost of cloth to 2 units of food.  If relative price of cloth lies between 2/3 and  2 units of food, the economy  produces both goods. If the price of cloth decreases below 2/3 → complete  specialization in food production → low compensation for producing cloth If the price of cloth  rises above 2 → complete specialization in cloth production → low compensation for producing  food

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