Reference no: EM13712352
The next three questions pertain to the two-good (M,F)-two-factor (K-L) Harberger model.
Unless noted otherwise, assume that each factor of production is always fully employed, all
markets are competitive, and K and L are mobile across sectors.
5. If the only tax is a tax on capital in M (tKM), the relative price of capital must fall if:
a) the M-sector is relatively labour intensive.
b) the F-sector is relatively labour intensive.
c) the elasticity of substitution between labour and capital in M is zero
d) the elasticity of substitution between labour and capital in F is zero
6. For the above tax (tKM), if the M-sector is relatively labour-intensive, the rental-wage ratio
(r/w) must fall if:
a) the factor-substitution effect is greater than the output effect.
b) the output effect is greater than the factor-substitution effect.
c) the wage rate, w, is above the minimum wage
d) the rental rate, r, is not a fixed number
7. If the only tax in this economy is an output tax on M, the r/w ratio will fall if
a) M-sector is relatively labour intensive
b) F-sector is relatively capital intensive
c) F-sector is relatively labour intensive
d) the capital-labour ratio is fixed in both sectors.
Can someone explain to me the Harberger Model and the answers to these questions?
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