Question

Specific Factor Model

3. Specific factor model a. Why is the specific-factors model referred to as a short run model? b. An economy can produce good 1 using labour and captal and good 2 using labour and land. The total supply of labour is 100 units. Given the supply of capital, the output of the two goods depend on labour input as follows: Labor Input to GoodI Labor Input to Good 2 Output of Good 2 0.0 39.8 52.5 61.8 69.3 5.8 of Good I 25.1 38. 48.6 57.7 66.0 73.6 80.7 87.4 93.9 100 20 30 50 70 70 80 86.7 91.4 95.9 100 i. ii. Graph the production function for good 1 and 2. Graph the production possibility frontier. Why is it curved? The marginal product of labour curves corresponding to the production functions are as follows: c. MPL in Sector 1 1.51 1.14 1.00 MPL in Sector 2 1.59 1.05 30 70 i. Suppose the price of good 2 relative to that ofgood 1 is 2. Determine graphically the wage rate and the allocation of labour between the two ii. Using the graph from question 3.b.i., determine the output for each sector Then confirm graphically that the slope of the production possibility frontier at that point equals the relative price. ii Suppose that the relative price of good 2 falls to 1.3. Repeat (i) and (i). v. Calculate the effects of the price change from 2 and 1.3 on wages in sector 1 and 2 Explain the effects of the price change on the welfare of workers and of the specific factors. v.

Answer 1

a.Specific factor model- short run model:

Specific factor model assumes that the economy produces good and services by using only two factors of production namely Labour and Capital. Generally it the amount of availability of factors of production cannot be changed over a short run because to increase the availability of Capital or Labour requires a long time and it cannot be changed within a short period.

Example: The following example will help to understood the concept more clearly : when a certain goods can be produced with the help of 10 labours and one equipment (Capital) and also the same goods can be produced with the help of 2 equipments (capital) and 5 labours. the economy can adopt any one method to produce the goods and it cannot shift between methods in short run since the acquisition of extra equipment (Capital) or Additional labour can not be done in short run.

Thus it can be said that the factor specific model is a short run analysis model.