Question

QUESTION 3 10 Consider the Specific Factors model. Malicuria, a small open economy, trades in Electronics and Maize. Electronics: Revenue: PEx Qe, consists of: Payments to Labor: W x Le = 70 Payments to Capital: Rxx K = 70 Maize: Revenue: PMX OM-150 Payments to Labor: W x L = 70 Payments to Land: RTxT-80 Holding the price of Electronics constant, suppose the price of maize went up by 15% and the wages went up by 10%. ART What happens to the rentals on land? (Enter the rate of change Ry in % with precision at least up to 0.1 p.p, that is for a decrease of "11.198 %"type in-11.2") QUESTION 4 What happens to the rentals on capital? (again answer in terms of rate of change, positive or negative, in % with precision at least up to 0.1 p.p, that is for a decrease of "11.198 %" type in "11.2")

Answer 1

Question 3)

We know that:

For Maize:

Revenue = Payments to Labor + Payments to land -----This is equation 1.

1)Now if price of maize rises by 15%, then Revenue will also rise by 15%.

Hence:

New revenue = Old revenue * 1.15

New revenue = 150 * 1.15 = 172.5

2)Wages also go up by 10%

Hence Payments to labor also go up by 10%

Hence:

New payments = old payments * 1.10

New payments to labor = 70 * 1.1 = 77

3) Now using the equation 1;

New revenue = new payments to labor + new payments to land

172.5 = 77 + new payments to land

New payments to land = 95.5

4) New payments to land = Old payments to land * (1+(Percentage increase in rentals to land/100))

95.5 = 80 * (1+(Percentage increase in rentals to land/100))

(1+(Percentage increase in rentals to land/100)) = 95.5/80 = 1.19375

Hence:

Percentage increase in rentals to land = 19.375 = 19.4%

Hence answer for question 3 is 19.4%. Hence type in 19.4

Question 4)

Similar to previous analysis, here the revenues remain the same, but the wages go up by 10%

Hence new payments to labor = 77, which is a rise of 7 units.

However, since revenues remain the same, we need to cut equivalently from the payments to capital.

Hence capital reduces by 7 units, or equivalently, -10%

Hence answer to question 4 is -10%. Hence type in -10.