# Kl ratio increases and the kl ratios in each sector

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K/L ratio, increases and the K/L ratios in each sector are constant , then the sector with the lower K/L ratio must contract absolutely . The result is a straightforward application of our “teeter-totter theorem.” 8. (a) If the dollar appreciates by 50%, the foreign exchange rate goes from 40 pazoozas/\$1 to (1.5)(40) = 60 pazoozas/\$1. The price of pazoozas in \$s therefore goes from 1/40 to 1/60 \$/pazooza, a depreciation of (1/60 – 1/40)/(1/40) = –1/3, or 33 1/3%. (b) If the zlotnik was at 1/5 = 0.2 pazoozas/zlotnik and depreciated by 20%, it is now at (1–0.2)(0.2) = 0.16 pazoozas/zlotnik, and so the pazooza is at 1/ 0.16 = 6.25 zlotniks/pazooza, an appreciation of (6.25 – 5)/5 = 25%. (c) Before, we had 40 pazoozas = \$1 and 5 zlotniks = 1 pazooza, and so \$1 equalled 40 x 5 = 200 zlotniks. Now we have 60 pazoozas = \$1 and 6.25 zlotniks = 1 pazooza, and so \$1 equals 60 6.25 = 375 zlotniks ; the dollar has appreciated by (375 – 200)/200 = 87.5% against the zlotnik. Note that we could reach the same result by multiplying the ratio of new to old foreign exchange rates, pazoozas/\$ x zlotniks/pazooza, = (1 + 0.5)(1+ 0.25)(200) = 1.875 x 200 = 375 zlotniks/\$1. 9. The answer is, “It depends.” If you suspected a trick, then you would have noticed that if half of Larry’s goods are 40% cheaper than Curly’s, then those goods are actu- ally 66 2/3% more expensive at Curly’s than at Larry’s, whereas the other half of the goods are only 60% more expensive at Larry’s than at Curly’s. This fact, however, does not mean that you are better off shopping at Larry’s. What is the condition that determines where you should shop? Let’s define P CC as the average price of those goods that are cheaper at Curly’s, and P CE as the average price of those goods that are more expensive at Curly’s. Then (since the number of goods of both types are equal), it will cost the same amount to

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