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Unformatted text preview: 1 = 1.069 Thus rental price of capital increases by 6.9% Share of real wage = 0.7 Y (W/P) 1 *L = 0.7 Y 1 (W/P) 2 *1.1L = 0.7 Y 2 (W/P) 2 *1.1L/(W/P) 1 *L = 0.7Y 2 /0.7Y 1 (W/P) 2 1.1/(W/P) 1 = Y 2 /Y 1 = 1.069 (W/P) 2 /(W/P) 1 = 1.069/1.1 = 0.972 Thus real wages decrease by 2.8% LONGER METHOD: MPK 1 = 0.3K0.7 L 0.7 MPK 2 = 0.3K0.7 (1.1L) 0.7 Calculate share of Y going to K. MPK 1 *K = 0.3K0.7 L 0.7 *K = 0.3Y 1 MPK 2 *K = 0.3K0.7 (1.1L) 0.7 *K = 0.3Y 2 Substitute (R/P) for MPK. (R/P) 2* K /(R/P) 1 K = 0.3Y 2 /0.3Y 1 = 1.069 Real rental price of capital increases by 6.9% MPL 1 = 0.7K 0.3 L0.3 MPL 2 = 0.7*1.069K 0.3 L0.3 Calculate share of Y going to L. MPL 1 *L = 0.7K 0.3 L0.3 *L = 0.7Y 1 MPL 2 *1.1L= 0.7*1.069K 0.3 L0.3 *L = 0.7*1.069*Y 1 Substitute (W/P) for MPL (W/P) 2 *1.1L /(W/P) 1 *L = 1.069 (W/P) 2 /(W/P) 1 = 1.069/1.1 = 0.972 Real wage decreases by 0.9721 = 2.8%...
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This document was uploaded on 10/28/2011 for the course ECON 420 at UNC.
 Fall '08
 Hill

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