Ch. 6 Problems

Ch. 6 Problems - Chapter 6 Problems reviewed in class 1, 2...

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Chapter 6 Problems reviewed in class 1, 2 and 6
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Problem 1 • Suppose only one technique can be used in production: a unit of clothing requires 4 labor- hours and 1 unit of capital; a unit of food requires 1 labor-hour and 1 unit of capital. At an initial equilibrium, wage rate and capital rental are each valued at $2. If both good are produced, what must be their prices? Now, keep the price of food constant and raise the price of clothing to $15. Trace the effects on income distribution: rank the relative changes on wage, rent, price of clothing and price of food. Is this the Stolper-Samuelson theorem?
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Problem 1 Answer If both goods are produced then to find prices use the competitive profit conditions (price equals marginal cost). The price of food is $4 and the price of clothing is $10. After the price of clothing rises to $15, to find the new wage and capital returns use the competitive profit conditions once again. This yields that the new wage is $11/3 and the return to capital falls to $1/3. Ranking the
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Ch. 6 Problems - Chapter 6 Problems reviewed in class 1, 2...

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