Homework 2 Solutions

Homework 2 Solutions - Homework 2 Name Purdue ID Part 1....

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Homework 2 Name Purdue ID
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Part 1. Questions that you do not need to turn in. Answer the following questions. You do not need to turn them in. Study Guide, Chapter 3, problems 2, 3, 4, 7b, 7c.
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Part 2 I. Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows: Automobiles: sales revenue = 200; payments to labor = 100; payments to capital = 100 Corn: sales revenue = 100; payments to labor = 40; payments to land = 60. Suppose the price of corn rises by 20%, the price of automobiles does not change, and wage increases by 10%. Assume that the quantities (including outputs for automobiles and corn and labor employments in corn and automobiles) do not change. Answer the following questions. 2 points each, 10 points total. (1). (2 points) What happens to the (nominal) income of land? The rise in wage increases labor payments for corn from 40 to 40x110% = 44. Sales revenue for corn rise from 100 to 100x120% = 120. This means payments to land are now 120 - 44 = 76. (2). (2 points) what happens to the (nominal) income of capital? The rise in wage increases labor payments for automobiles from 100 to 100x110% = 110. Sales revenue for automobiles do not change. So payments to capital are now 200 - 110 = 90. (3). (2 points) What happens to the real income of land?
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Homework 2 Solutions - Homework 2 Name Purdue ID Part 1....

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