Home Work 3 - Fall - 2023 - Answer Key

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Economics

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Feb 20, 2024

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Econ 3HH3 Fall 2023 Home Assignment #3: Answer Key. 1. (10 points). 2 countries, Gryffindor and Slytherin , produce 2 goods, magic potions (denoted by MP) and magic wands (denoted by MW). Assume that lemon grass (denoted by G) is a factor specific to magic potions, magic oak (denoted by O) is a factor specific to magic wands, and troll labor (denoted by L) is free to move between 2 sectors. (a) Consider Slytherin. Holding constant the price of magic wands, suppose the decrease in the price of magic potions is 10% and the decrease in the troll wage is 5%. Determine the impact of these changes on the real rentals on lemon grass and magic oak by using information below: Magic potions: Sales revenue P MP Q MP = 750 Payments to troll labor WL MP = 500 Payments to lemon grass owners R G G = 250 Magic Wands: Sales revenue P MW Q MW = 60 Payments to labor WL MW = 20 Payments to magic oak owners R O O = 40 Answer: Using the same logic as in the numerical example from Chapter 3, the rental on lemon grass is found by calculating the following: and using the same logic, the rental on magic oak is Putting everything together, we get magnification effect:

Assuming that the decrease in the price of magic potions leads to a fall in wage by 5%, lemon grass owners would be worse off because the rental on lemon grass would decrease more than the drop in the price of magic potions ( -20% < -10%). Magic oak owners would be better off as the rental on magic oak rises (+2.5%). (b) How would your answer in part (a) change if the 5% decrease in the troll wage was caused by the decrease in the price of magic wands, while the price of magic potion remained fixed? (You do not need to calculate anything, just explain.) Answer: using the similar logic, we can get magnification effect: so that when the decrease in the price of magic wands leads to a fall in wage by 5%, lemon grass owners would be better off because the rental on lemon grass would increase. Magic oak owners would be worse off as the rental on magic oak falls more than the drop in the price of magic wands.

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