none International Economic Relations XXXXXXXXXX) Instructor: JaeBin Ahn Problem Set I-B This version: October.20, 2021 Due on (11:59pm) October 31, 2021 at XXXXXXXXXX with an email subject line that...

An economy can produce leather using labor and capital and wheat using labor and land. The total supply of labor is 50 units. Given the supply of capital, the outputs of the two goods depend on labor input as follow


none International Economic Relations (875.512) Instructor: JaeBin Ahn Problem Set I-B This version: October.20, 2021 Due on (11:59pm) October 31, 2021 at [email protected] with an email subject line that begins with [PS1-B: 875.512] 1. Specific factors model; Problem 2 on p.108 (KOM): An economy can produce leather using labor and capital and wheat using labor and land. The total supply of labor is 50 units. Given the supply of capital, the outputs of the two goods depend on labor input as follows: Labor Input to Leather Output of Leather Labor Input to Wheat Output of Wheat 0 0 0 0 5 27 5 19.8 10 38.5 10 31.2 15 47.3 15 42.3 20 56 20 52.1 25 65.7 25 60.6 30 74.5 30 69 35 82.4 35 77.4 40 88.2 40 85.4 45 94.1 45 93.1 50 100 50 100 a. Graph the production functions for leather and wheat. b. Graph the production possibility frontier. Tip: you may use an Excel to draw these graphs. 2. Specific factors model: Suppose that the marginal product of labor curves are as follows: Workers employed MPL in Sector1 MPL in Sector 2 10 1.51 1.59 20 1.14 1.05 30 0.97 0.82 40 0.87 0.69 50 0.79 0.61 60 0.74 0.54 70 0.69 0.50 80 0.66 0.46 90 0.63 0.43 100 0.60 0.40 mailto:[email protected] a. Suppose further that the price of good 2 relative to that of good 1 is 2, and the number of total workers in the country is 100. Draw a graph that can determine the wage rate and the allocation of labor between the two sectors. What is the approximate wage rate in the equilibrium? How many workers are (approximately) employed in Sector 1 and Sector 2, respectively? b. Suppose now that the price of good 2 relative to that of good 1 falls to 1. Draw a graph that can determine the wage rate and the allocation of labor between the two sectors. What is the approximate wage rate in the equilibrium? How many workers are (approximately) employed in Sector 1 and Sector 2, respectively?