Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile...
Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile between sectors. If there is an increase in the amount of capital, holding the prices of agricultural and manufacturing goods constant, what happens to the equilibrium nominal wage rate and labor allocation? What happens to the rental rate of capital? What happens to the rental rate of land?
Homework Answers
When there is an Increase in the amount of capital this lead to firms to produce more goods.
And for increasing the production, the firms need labors so demand of labor increases for the manufacturing.
Increase in the demand of labor keeping the supply of labor constant causes to increase in the nominal wage rate in the manufacturing sector.
And as there is an increase in wage in manufacturing sector, it attract more labor so labor will highly mobile from agriculture sector to manufacturing sector. As a result, more labor will be in manufacturing sector and less in the agriculture sector.
Supply of labor in the manufacturing sector increases due to migration and as a result, wage will decrease. Therefore, rental rate of capital will reduce while due to decrease in the supply of labors in the agriculture, rental rate of land increases.
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