How to read this
Robinson has hours. Working of them yields coconuts, so the red frontier is all he can have. His best point is where an indifference curve touches it. To decentralise it, split him into a manager who maximises profit at the real wage , and a consumer who spends the wage and the profit.
- With a convex technology and equal to the slope at , both halves choose again.
- Choose Increasing returns at x* or Loss at x*: the manager hires a different amount of labour, and the markets do not clear.
- Open economy: at a world price he can consume beyond his own frontier.
Example
Technology
Preferences
Markets
In the closed economy the price is set to .