Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between...

Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows:
Automobiles: Sales revenue = 200; payments to labor = 100; payments to capital = 100
Corn: Sales revenue = 100; payments to labor = 40; payments to land = 60
Holding the price of automobiles constant, suppose the increase in the price of corn is 20% and the increase in the wage is 10%.
What is the impact of this on the income of land and the income of capital? What has happened to the real income of land? What has happened to the real income of capital? What has happened to the real income of labor?

Solutions

Expert Solution

For production of corn: land, labor are used
For production of automobiles: capital and labor are used.
With the price of the automobiles constant there is increase in the price of corn by 20% and increase in wage is 10%.

IMPACT ON INCOME OF LAND:

Income of land will increase. Because as price increases for labor , they will move towards agricultural (corn) sector. There, the price of automobiles haven't increased nor does the price of capital. On the other hand in production of corn amount of labor will be more now and more labor labor will be there on sae piece of land thus productivity of land will increase and so its income.

INCOME OF CAPITAL :

Income of capital will increase as less labor is available now for the manufacturing sector so more capital will replace labor.

Real income of land will increase whereas real income of labor will decrease as more labor are induced in agricultural sector now. Real income of capital will increase.

Rahul Sunny answered 3 weeks ago

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