Section 02_05_2010

Section 02_05_2010 - employed e Assume there are 100 units...

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Sections 105 and 106 - ECON 181 02/05/2010 GSI: Pedro Castro 1)(Specific factors model) Consider an economy A with 100 units of labor. Two goods are produced in economy A: food (F) and manufacture (M). Capital (K) is only used in the manufacture sector and land (T) is only used in the food sector. Labor is mobile between sector and it is used in the production of both goods. The production function of food and manufacture is given by Q F (L,T)=L F (0.5) * T (0.5) ) Q M (L,K)=L M (0.5) * K (0.5) Assume all the available inputs are used in production. a) Derive an expression for the marginal product of labor in each sector. b) Assuming the firms in each sector take the prices as given, what is the wage in each sector as a function of the input levels? c) Use the fact that to labor is mobile across sector to derive a relationship between the prices in each sector and the amount of the inputs available in this economy. d) For each sector, is there diminishing, constant or increasing returns in the quantity of labor
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Unformatted text preview: employed? e) Assume there are 100 units of land and 100 units of capital available. Draw the production possibilities frontier (PPF) for this economy. 2)(Specific factors model) Now there are two countries A and B. The production functions in each sector are the same as above and equal for both countries. Each economy have 100 units of labor and capital. a) If before start trading the relative price of food is equal in both economies and the ratio of the allocation of labor in the food sector relative to the manufacture sector (L F /L M ) is higher in economy A than in B, which economy has a higher endowment of land? b) Suppose there is free trade. Assume that before trade the relative price of manufacture was higher in economy B. Draw the same graph used in lecture to show how the allocation of labor between sectors change in economy B. How will the relative price of manufacture under free trade compare with the price of manufacture in the closed economies?...
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