An economy is described by the specific factors model. Use the information given here to answer the following questions:
Manufacturing: Sales revenue = PM × QM = 150 Payments to labor = W × LM = 100 Payments to capital = RK × K = 50
Agriculture: Sales revenue = PA × QA = 150 Payments to labor = W × LA = 50 Payments to land = RT × T = 100 Holding the price of agriculture constant, suppose the price of manufacturing falls by 20% and the increase in the wage is 10%.
(a) Would landowners or capital owners be better off? Explain.
(b) How would the decrease in the price of manufacturing affect labor? Explain..
a) Here price of manufacturing sector falls by 20 percent that is Pm =20%, and all the sectors are specific factor model.
price magnifacation effect in case of Jonce (71) is , rm<pm<w<pa<rt
Hence capital owner will be worse off (as r in manufacturing sector decreases that is return of capital falls), land owner will be better off as rt increases or return to land rises.
b) As manufacturing sector shrinks as price of the products decreases, then lm (demand for labor by manufacturing sector will fall) but la will rise as surplus labor will be absorbed in agricultural sector( here labor is mobile)
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