Suppose that the price of good 2 relative to that of good 1

Question

The marginal product of labor curves corresponding to the production functions in problem 2 are as follows:

Workers Employed	MPL in Sector 1	MPL in Sector 2
10	15.1	15.9
20	11.4	10.5
30	10	8.2
40	8.7	6.9
50	7.8	6
60	7.4	5.4
70	6.9	5
80	6.6	4.6
90	6.3	4.3
100	6	4

a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically the wage rate and the allocation of labor between the two sectors.

b. Using the graph drawn for problem 2, determine the output of each sector. Then con?rm graphically that the slope of the production possibility frontier at that point equals the relative price.

c. Suppose that the relative price of good 2 falls to 1.3. Repeat (a) and (b).

d. Calculate the effects of the price change from 2 to 1.3 on the income of the speci?c factors in sectors 1 and 2.

Answer 1

The assignment described here mainly focuses on the marginal product of labor curves. By considering the table and information provided in the assignment, respond to the following: 1) Assume that the price of good 2 relative to that of good 1 are 2. Find out graphically the wage rate and the allocation of labor among the two sectors. 2) By using the graph drawn for problem, find out the output of each and every sector. Then confirm graphically that the slope of the production possibility frontier at that point equivalents the relative price. 3) Assume that the relative price of good 2 drops to 1.3. Repeat (1) and (2). 4) Compute the effects of the price change from 2 to 1.3 on the income of the particular factors in sectors 1 and 2.