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1. Assume that a country is endowed with equal amounts of K and T. Prices are PX = Py = $2 and the country's total labor force is L =300= Lx + Ly. Labor is fully mobile between the two sectors. K is specific to the X sector and T is specific to the Y sector. Total endowment of K is 180 and total endowment of T is 180. Marginal products are given as: MPLX= K/Lx and MPLY= T/Ly. MPKX= Lx/K and MPTY= Ly /T.
a. How is labor distributed between the X and Y sectors in equilibrium? Suppose: PX increases by 200% and Py by 100%.
b. What is the new labor distribution?
c. Has output of X and Y changed?
d. What happens to i. The real wage of workers ii. The real return to capital iii. The real return to landowners
e. Perform the same analysis again (solve b-d again), but for a situation where PX increases by 50% and Py remains stable. How is your answer different?
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