France produces two goods-bread and wine

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Question

France produces two goods: bread and wine. There are two factors of production, labor and capital, that are mobile across industries. The production function for bread is given by = 2/31/3 and the production function in the wine industry is given by = 1/32/3. The total supply of labor and capital in France are both equal to 100. Explain all your answers and intermediate steps:

a) Why is the ratio MPL/MPK (marginal products of L and K) equal across industries?

b) Provide a relationship between the labor intensity in the wine industry (relative use of labor vs capital) and the wage to rental ratio w/r in equilibrium (provide details)

c) Suppose that, in an extreme case, France ends up specializing in the wine industry (zero production of bread). What would be the wage to rental-rate ratio w/r in such an equilibrium?

d) Now, suppose that the demand for bread increases, so that the relative price of bread increases and France now also produces bread. Are capital owners better off or worse off?

Reference no: EM133636813

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