The economy of Leisureville, CO, produces only two goods:
skis and bikes. Labor is the only variable input into production, there are diminishing returns to labor, and all workers
are paid the same wage. All markets are competitive, and initially the economy is in general equilibrium. Now, due to a
change in tastes, consumers’ preferences change away from
skis and toward bikes.
a. What will happen to consumers’ willingness to pay for
bikes and for skis? What will therefore happen to the
market prices for bikes and skis?
b. As the prices adjust, what will happen to the value of the
marginal product of labor in bikes and in skis? What will
happen to bike producers’ and ski producers’ willingness
to pay for workers?
c. As adjustments are made in employment, what happens to
the output of bikes and of skis? How does the marginal
product of labor in bikes and in skis respond? What therefore happens to the value of the marginal product of labor
in bikes and in skis?
d. At what point does this process stop?