Question

the technology for cutting hair has changed in the last 100 years, whereas technology for growing wheat has improved dramatically. What do you think happened to the relative prices of haircuts and wheat? What do you think has happened to the relative income of barbers and farmers? Explain how this is possible. The price elasticity of demand for a good measures how much the quantity of the good demanded responds to a decline in the goods price. Specifically, the price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price. How is a good's price elasticity of demand related to whether technological progress in producing a good will lead to a rise of decline in the share of the economy's tota spending on that good?

Answer 1

For the relative prices, note that the high rate of productivity in the farming sector will create a fall in the real price of wheat; whereas, the lack of signi?cant change in productivity in the hair-cutting sector will maintain the real price for haircuts. Thus, the fall in the price of wheat implies that the relative price of haircuts has risen, and the relative price of wheat has, of course, fallen. The improvement in technology for growing wheat raises the marginal productivity of labor for farmers, and because workers are always paid their marginal products, the real wage for farmers will rise, ceteris paribus. Similarly, the absence of technological improvements in cutting hair maintains the marginal productivity of barbers and the real wage for barbers does not change, ceteris paribus. However, because workers are free to move from the low marginal productivity hair cutting sector to the high marginal productivity farming sector, the equilibrium wage for both sets of workers will be equal. Ultimately, the real wages of both farmers and barbers will rise because of higher productivity in the farming sector (simply, more output is now produced)