Question

Question 2

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..

Answer 1

a) Here price of manufacturing sector falls by 20 percent that is P^m =20%, and all the sectors are specific factor model.

price magnifacation effect in case of Jonce (71) is , r^m<p^m<w<p^a<r^t

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 r^t increases or return to land rises.

b) As manufacturing sector shrinks as price of the products decreases, then l^m (demand for labor by manufacturing sector will fall) but l^a will rise as surplus labor will be absorbed in agricultural sector( here labor is mobile)