uppose both East and West have 25 workers and both produce wheat and cars. The marginal...

uppose both East and West have 25 workers and both produce wheat and cars. The marginal product of labor in East is 4 and 2 for wheat and cars, respectively. The marginal product of labor in West is 1 and 1 for wheat and cars, respectively. How do you calculate world relative price?

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Expert Solution

In the given condition the world consists of two segments that is East and West where the marginal product differs. Marginal product basically means each additional unit of output produced or obtained b employing any additional unit of input or factors of production. Thus, marginal product of labor for wheat and cars in East is both for both the products than what it is in the West. The relative price simply means that the price of a particular god, service or any commodity in terms of another comodity. Sometimes the relative price cannot be calculated and thus we will calculate it by taking ratios. If we consider the nominal or absolute prices of each goods in the respective places then the price of each good in the West would be higher as less in produced when per unit of labor is employed while the nominal or absolute price would be lower in the East as the output when per unit is employed is much higher than the West in the East. Thus for calculating the raltive price of goods we will divide the price of goods of one side with the prices of goods with the other side. Ans that is how we will get the relative price of one good in terms of the other and also know the oppotunity cost.

Rahul Sunny answered 1 year ago

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