Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2...

Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions q1 = L10.5K0.5 and q2 = L20.5T0.5 where Li is the labor input in sector i = 1, 2, K is capital, and T is land.

a. Suppose there is capital inflow from the foreign country so that K increases. How would this affect the marginal product of labor in sector1. (If you do not know differentiation, just substitute numbers into the production function to see what happen.)

b. Assuming the prices of the two goods do not change. How would the capital inflow affect wage? Are the workers better off?

c. How does capital inflow affect the rentals to capital and land?

Solutions

Expert Solution

Rahul Sunny answered 1 month ago

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