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101+Class+20+W2009

# Example light bulb manufacturing ge owns light bulb

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Unformatted text preview: d. in Hungary is relatively labor intensive if labor is relatively inexpensive Minimum Wages In Ohio \$7/hour In Hungary HUF 69,000 per month Approx \$1020/month (160 hours/month) Approx \$420/month If costs of capital are similar then labor is relatively inexpensive Assessing the costs of capital Cost of capital is usually associated with the rental price Also depends on the costs of financing Capital owners forgo the rental price in any given period if they use the capital (opportunity cost) Varies between locations based on trade/transactions distortions "Cost of capital" in a given environment usually refers to the cost of raising funds e.g. selling bonds requires a promise to make interest payments Also depends on relative tax treatment E.g. depreciation allowances lower costs of capital Question Suppose Hungary joins the EMU in 2009, and wages soon rise to equal US wages Are we likely to see Hungary manufacturing as capital intensively as the US? Depends on the relative costs of capital The location with the lower cost of capital will display higher capital intensity Factor Demand and Output Supply For a two input model, optimal values of L and K are associated with: Once we know the optimal values of K and L (call them K* and L*), we also know output: MPL = W/P and MPK = R/P Therefore, the input choice also provides insight into the supply decision Q = f(L...
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