Question

The country of Freedonia produces cars and avocados using capital, which is specific to cars; land, which is specific to avocados; and labor, which is mobile between the two sectors. Freedonia has 100 workers, 100 units of capital and 400 acres of land.

We assume our framework to be the “Specific-Factors Model”.

a) Define the marginal product of labor and the marginal product of land in the avocado sector. [4 marks]

b) Draw the production possibilities frontier for Freedonia with avocados on the horizontal axis, and cars on the vertical axis. [2 marks]

c) Explain how the price of avocados relative to cars is determined in the absence of trade. [2 marks]

d) Draw the wage curves of both sectors in one single graph, with the amount of labor used in cars (measuring from left to right along the horizontal axis), and the amount of labor used in avocados, moving in the reverse direction. [4 marks]

e) What does the assumption of free mobility of labor imply for the no-trade equilibrium wage in Freedonia. Explain. [4 marks]

Answer 1

Q a) The Marginal product of labor refers to the increase in the production of number of avocados when there is an increase in the labor. To explain in a simpler way, let us assume that 100 workers can sow 1000 seeds each which means there is a possibility of getting 1,00,000 fruits per day. Similarly, if there is an increase of 50 workers, the production of fruits will increase to 1,50,000 fruits. Hence, there is an increase of 50,000 fruits per day.

The Marginal product of land stands for if excess land is being bought and used for producing the fruits, undoubtably, there will be increase in the production of avocados as well. For example, If 10 acres of land can allow us to produce 1,00,000 avocados per season. And when additional 5 acres of land is added, the production of avocados will increase to 1,50,000 avocados. Hence, there will be again an increase of 50,000 avocados per day.

In both the scenarios, there will be definate increase of production of avocados.

Q b) Kindly draw Avocados on the horizontal axis and cars of the vertical axis.

Q c) The Price of avocados can no where ne compared to cars whether in the presence or absence of Trade. The reason being is the price of Cars is much more higher and the prices of avocados is no where even closer to the Prices of cars in the market. In the absence of Trade, this will not go hand-in-hand as well, as the vendors dealing with Cars will completely ignore the prices of avocados.

Q e) The assumption of free mobility of labor imply for the no-trade equilibrium wage is the workers should get a minimum wage irrespective of any work they take-up. This will give them a secure sense of working if they are hired in any sector. The workers should be ensured that they will be given benefits with regards to their Health, Family and many more perks. As a result, there will be increase in productivity of the labor and healthy production. the Production Possibility curves will also be having a positive impact and going up.

This is the major expectation of the workers irrespective of the work they are given and the sector they work in. The benefits will be definately great if they are assured of equlibrium wage,