There are two countries, Home and Foreign, each producing only one good by using labor and...

There are two countries, Home and Foreign, each producing only one good by using labor and capital. The supply and the quality of labor as well as the technology of production are identical in both countries and labor mobility between the countries is not allowed. The marginal productivity of the 1st unit of capital used is 20 whereas the marginal productivity of the 9th unit is 12 and there is a linear relation between the marginal product of capital and the amount of capital used. Initially, there are 11 units of capital used in Home and 3 units of capital used in Foreign. Assume competitive markets and normalization such as p=1€ in both countries.

a) Derive and draw the linear function for the marginal product of capital.

b)Find the effect of free capital mobility on capital utilization, production, the rental price of capital, and the income of workers in both countries by the situations before and after capital mobility.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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