Question

Specinic-Tactors model-part 2 Suppose that land is specific to corn, capital is specific to automobiles, laboris mobile between sectors, and payments are as follows: Automobiles: Sales revenue = 200; Payments to labor = 100; Payments to capital = 100 Corn: Sales revenue = 200; Payments to labor = 40; Payments to land = 160 Suppose price of corn increases by 20%, the price of automobiles increases by 10%. and the wage increases by 15%. DN Calculate the Nominal Percentage change on Rental of Capital and put your answer in the box below. (Keep your answer in percentage with 2 decimals. For example, If you got 15.26% , fill in 15.26 in the box below. Do NOT use 0.1526.) - 10

Answer 1

As the capital is used in automobile industry, we will use the information given about automobile sector.

Assuming that the demand in automobile sector remains constant, a 10% increase in the price of automobiles will increase the revenue by 10%. So total revenue = 200+ (10/100)*200 = $220.

The increase in wages is 15%, so the new wages =

= 100+ 0.15*100

= $115.

So, the rent to capital = $220 - $115 = $105.

The Percentage change on the rental of capital =

= ((105-100)/100) * 100

= 5%.

The answer will be 5.

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