Search for question
Question

Question 1 (30 Points) An economy can produce good 1 using labour and capital and good 2 using labour and capital. The total supply of labour is 100 units. Given the supply of capital and capital, the marginal products of labour for the two goods are as follows: Workers Employed 10 20 30 40 50 60 70 80 90 100 MPL in Sector 1 4.53 3.42 3 2.61 2.34 2.22 2.07 1.98 1.89 1.8 MPL in Sector 2 4.77 3.15 2.46 2.07 1.8 1.62 1.5 1.38 1.29 1.2 a) Suppose that the price of good 1 is $1 and the price of good 2 is $2. Determine graphically the wage rate and the allocation of labour between the two sectors. [10 points] c) Suppose that the relative price of good 2 falls to 1.3. Repeat a). [10 points] d) Calculate the effects of the price change on the income of the specific factors (capital and capital) in sectors 1 and 2. [10 points]

Fig: 1