SPECFAC - Specific Factors Models: Argument to show that an...

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Specific Factors Models: Argument to show that an increase in the endowment of the specific factor decreases the real return (per unit) of both specific factors. Assumptions : (1) 3 factors : labor (L, mobile) , land (T, specific to food sector ), capital (K, specific to manufacturing sector). (2) 2 goods: manufactures (M) and food (F). (3) Production Functions: q = f (L , K) M M M q = f (L , T) F F F Both production functions exhibit constant returns to scale (they are homogeneous of degree one) and are assumed to be increasing functions of both inputs. (4) Perfect competition. Implications from our assumptions : (5) Our assumption (3) implies that the marginal products are functions of the input ratios used. Specifically, Food sector: MPL is a decreasing function of L / T or an increasing function of T / L . F F F MPT is a decreasing function of T / L or an increasing function of L / T. F
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