ECN101 PS2 #3

ECN101 PS2 #3 - The wage is in terms of how much other...

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According to the neoclassical theory of distribution, the real wage earned by any worker equals that worker’s marginal productivity. Let’s use this insight to examine the incomes of two groups of workers: farmers and barbers. a. Over the past century, the productivity of farmers has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to their wage? If farmers have a Cobb-Douglas production function, and A increases, then the MPL also increases. Given a constant supply of farmers, their real wage increases to match the higher MPL. b. In what units is the real wage in part (a) measured? The wage should be measured in terms of what the farmers’ produce will purchases from other producers. c. Over the same period, the productivity of barbers has remained constant. What should have happened to their real wage? Given a constant MPL, barbers should have experienced no wage change. d. In what units is the real wage in part (c) measured?
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Unformatted text preview: The wage is in terms of how much other production a haircut will buy. e. Suppose workers can move freely between being farmers and being barbers. What does this mobility imply for the wages of farmers and barbers? Barbers will respond to the higher relative wage of farmers by moving into farming. f. What do your previous answers imply for the price of haircuts and the price of food? The supply of labor in the barber business will fall, increasing the MPL of the remaining barbers and raising their wage. The barbers who have turned farmers will drive down the wage rate but will still be earning more than if they had remained barbers. In equilibrium the wages in the two occupations will be equal IF all other characteristics of the jobs are equally desirable (a BIG assumption). g. Who benefits from technological progress in farming – farmers or barbers? Both benefit. Everyone shares in the gains from technological improvement....
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