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The following equations describe the prices and marginal costs of producing corn and toys in a...

  1. The following equations describe the prices and marginal costs of producing corn and toys in a country. The numbers in the equations indicate the amounts of labor and land needed to produce a unit of corn and a unit of toys. In the equations, the wage rate and the rental rate are denoted by ‘w’ and ‘r,’ respectively.

Pcorn = 80w + 40r

Ptoys = 100w + 30r

a. If the price per unit of corn and the price per unit of toys are initially $200, calculate the wage rate and the rental rate. Calculate the labor cost per unit of corn and per unit of toys. What is the rental cost per unit of corn and per unit of toys?

b. Suppose post-trade the price of corn increases to $240. The price of toys remains unchanged. What are the new values for ‘w’ and ‘r’ after adjustment to the new long-run situation?

c. What is the change in the real wage with respect to each good? What is the change in the real rental rate with respect to each good?

  

d. How does the finding in part c. relate to the Stolper- Samuelson theorem? Explain in detail.

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Answer #1

The following equations describe the prices and marginal costs of producing corn and toys in a country. The numbers in the equations indicate the amounts of labor and land needed to produce a unit of corn and a unit of toys. In the equations, the wage rate and the rental rate are denoted by ‘w’ and ‘r,’ respectively.

Pcorn = 80w + 40r

Ptoys = 100w + 30r

we will solve these equations taking intitial cost $200 and then $240 for corn to find the labor and rental cost per unit of corn and per unit of toys and it is consistent with Stolper- Samuelson theorem as per the details below:


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