The entire economy consists of two industries, Industry 1 and Industry 2. Their production functions are as follows: Y1 = A1K1^1/3L1^2/3 and Y2 = A2K2^1/3L2^2/3 Assume that the price, P1, and P2, A2, K1, and K2 are fixed. [a] Show mathematically the real wages of the two industries. [b] Suppose that the two industries initially offer the same nominal wage rate, i.e., w1 = w2. Now if the technological progress of Industry 1 rises, (i.e., A1 rises), how does that affect w1? [c] If there are no unemployed people and the two industries compete with each other in terms of labor demand, Industry 2 has to offer the same wage rate that Industry 1 offers. How does that affect the quantity of labor Industry 2 hires and, in turn, the size of its output? [Hint: assume that A2 and K2 are fixed.]
The entire economy consists of two industries, Industry 1 and Industry 2. Their production functions are as follows:
Y1 = A1K1^1/3L1^2/3 and Y2 = A2K2^1/3L2^2/3
Assume that the price, P1, and P2, A2, K1, and K2 are fixed.
[a] Show mathematically the real wages of the two industries.
[b] Suppose that the two industries initially offer the same nominal wage rate, i.e., w1 = w2. Now if the technological progress of Industry 1 rises, (i.e., A1 rises), how does that affect w1?
[c] If there are no
Step by step
Solved in 5 steps with 6 images
