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Calculate the effects of the price change

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a. Suppose the price of wheat relative to that of leather is 5. Determine graphically the wage rate and the allocation of labor between the two sectors.

b. Using the graph drawn for problem 2, determine the output of each sector. Then confirm graphically that the slope of the production possibility frontier at that point equals the relative price.

c. Suppose the relative price of wheat rises to 8. Repeat (a) and (b).

d. Calculate the effects of the price change from 5 to 8 on the income of the specific factors in sectors 1 and 2.

Reference no: EM133078595

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