Question

Earlier this year, U.S. president Donald Trump expressed his interest in buying Greenland, a selfgoverned island which belongs to Denmark, and incorporate it into U.S. territory. Imagine that Donald Trump is granted his wish and Greenland joins the U.S. You are interested in the short-run eect in the U.S. of this acquisition of land. (Note: The total population of Greenland is less than 60,000 people, so in your analysis, you can assume that the size of the U.S. labour force remains constant, and only the amount of land in the U.S. increases.)
For the sake of this exercise, you can model the U.S. as consisting of two sectors, a manufacturing sector and an oil-producing sector. Manufacturing uses labour and capital, whereas oil uses labour and land.

(a) What is the short-run impact of the increase of land on the wage of U.S. workers?
Illustrate using a suitable graph.

(b) Write a short verbal description of your result in (a) and explain what has happened to the real wage.

(c) What is the short-run impact of the increase of land on production in the manufacturing and oil sectors? Illustrate using a suitable graph. Do not forget to label all elements shown in your graph!

(d) What is the short-run impact of the increase of land on the rental rate of landowners?
Explain. Hint: In your explanation, you can refer to your graph from part (a).

Please help me answer these four questions. I don’t know how to solve this questions . thank you

Answer 1

The labor market differs somewhat from the market for goods and services because labor demand is a derived demand; labor is not desired for its own sake but rather because it aids in producing output. Firms determine their demand for labor through a lens of profit maximization, ultimately seeking to produce the optimum level of output and the lowest possible c

In order to find the equilibrium quantity and price of labor, economists generally make several assumptions:

• The marginal product of labor (MPL) is decreasing;
• Firms are price-takers in the goods market (cannot affect the price of output) as well as in the labor market (cannot affect the wage rate);
• The supply of labor is elastic and increases with the wage rate (upward sloping supply); and
• Firms are profit-maximizers.

The marginal revenue product of labor (MRPL) is equal to the MPL multiplied by the price of output. The MRPL represents the additional revenue that a firm can expect to gain from employing one additional unit of labor – it is the marginal benefit to the firm from labor. Under the above assumptions, the MRPL is decreasing as the quantity of labor increases, and firms can increase profit by hiring more labor if the MRPL is greater than the marginal cost of that additional unit of labor – the wage rate. Thus, firms will hire more labor when the MRPL is greater than the wage rate, and stop hiring as soon as the two values are equal. The point at which the MRPL equals the prevailing wage rate is the labor market equilibrium.