2. (Adapted from FT) Suppose that in a country, there are two goods that can be produced: good 1 and good 2. 1 For good 1, we know that: Sales revenue = P191 = 200 Payments to capital = K₁r = 100 Payments to labor = L₁w = 100 (a) Which good is capital intensive? For good 2, we know that: Sales revenue = p292 = 200 Payments to capital = K₂r = 50 Payments to labor = L2w = 150 (b) How do the wage and the rental on capital change if price of good 1 increases by 5%? To simplify the analysis, we assume that the price of good 2 does not change, nor do the quantities produced of each good, or the quantities of production factors used for producing each good. (c) Which factor gains in real terms? What can you conclude about a change in the relative price on the returns to production factors?
2. (Adapted from FT) Suppose that in a country, there are two goods that can be produced: good 1 and good 2. 1 For good 1, we know that: Sales revenue = P191 = 200 Payments to capital = K₁r = 100 Payments to labor = L₁w = 100 (a) Which good is capital intensive? For good 2, we know that: Sales revenue = p292 = 200 Payments to capital = K₂r = 50 Payments to labor = L2w = 150 (b) How do the wage and the rental on capital change if price of good 1 increases by 5%? To simplify the analysis, we assume that the price of good 2 does not change, nor do the quantities produced of each good, or the quantities of production factors used for producing each good. (c) Which factor gains in real terms? What can you conclude about a change in the relative price on the returns to production factors?
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:2. (Adapted from FT) Suppose that in a country, there are two goods that can be produced:
good 1 and good 2.
1
For good 1, we know that:
Sales revenue = P191 = 200
Payments to capital = K₁r = 100
Payments to labor = L₁w = 100
(a) Which good is capital intensive?
For good 2, we know that:
Sales revenue = p292 = 200
Payments to capital = K₂r = 50
Payments to labor = L2w = 150
(b) How do the wage and the rental on capital change if price of good 1 increases by 5%?
To simplify the analysis, we assume that the price of good 2 does not change, nor do
the quantities produced of each good, or the quantities of production factors used for
producing each good.
(c) Which factor gains in real terms? What can you conclude about a change in the relative
price on the returns to production factors?
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