Question

In the US, suppose that the production of services relies on "tech" engineers T and regular labor L_S, with the following production function: Y_S = T^1/2 L_S^1/2 and the production of Manufacturing relies on K and L_M, with: Y_M = K^1/2L_M^1/2. "Tech" engineers are only employed in services while regular labor is mobile between service and manufacturing. K is used only in Manufacturing.

a) What is the marginal product of labor (MPL) in each industry, depending on L_M and L_S?

b) Following a change in exposure to trade, relative employment in Manufacturing vs. Services decreases by 4%. Deduce by how much the relative price of Manufacturing has decreased.

c) Do "tech" engineers gain more from trade exposure compared to regular workers? Explain.

Answer 1