HW327-062 - ECON327 Prof. Wei Ge 02 October 2006 Homework...

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ECON327 Prof. Wei Ge 02 October 2006 Homework #2 Q-1 . Consider the following price-cost relationships in the long run: P A = 12w + 8r and P C = 15w + 5r, where P A and P C are the unit prices for aircraft and cloth, respectively, and w and r denote prevailing nominal wage and rental rates. (a) If initially P A = P C = 20, (i) what are the values for w and r? 8r=20-12w r=2.5-1.5w 15w+5r=20 15w+12.5-7.5w=20 w = 1 r = 1 (ii) What is the labor cost per unit output of aircraft, and per unit output of clothing? Aircraft: 12(1) = 12 Clothing: 15(1) = 15 (iii) What is rental cost per unit output of aircraft, and per unit output of clothing? Aircraft: 8(1) = 8 Clothing: 5(1) = 5 (b) Suppose now that P C = 24 and P A remains unchanged. What are the equilibrium values of w and r in the long run? P A = 12w + 8r = 20 P C = 15w + 5r = 24 r = 0.205 w = 1.53 (c) Compare (a) and (b), what are the changes in real wage and real rent with respect to each good? The real wage with respect to aircraft increases from 0.05 to 0.0765. The real wage with respect to clothing increases from 0.05 to 0.06375.
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HW327-062 - ECON327 Prof. Wei Ge 02 October 2006 Homework...

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