1、1Chapter 31. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana 1986 was a year of economic decline. Why?It can deduce that Texas and Louisiana are oil-prod
2、ucing states of United States. So when the price of oil on world markets declined, the real wage of this industry fell in terms of other goods. This might be the reason of economic decline in these two states in 1986.2。An economy can produce good 1 using labor and capital and good 2 using labor and
3、land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depends on labor input as follows:To analyze the economys production possibility frontier, consider how the output mix changes as labor is shifted between the two sectors.a. Graph the production f
4、unctions for good 1 and good 2. ),(),( 2211 LKQLKQProduction Function for Good 1025.1 38.148.6 57.566 73.680.7 87.4 93.910001020304050607080901000 10 20 30 40 50 60 70 80 90 100Labor Input for Good 1OutputProduction Function for Good 2039.852.5 61.869.3 75.8 81.586.7 91.4 95.510001020304050607080901
5、000 10 20 30 40 50 60 70 80 90 100Labor Input for Good 2Output2b. Graph the production possibility frontier. Why is it curved?Q1Q2L1L2PPF),(22LKQ ),(11LKQ010The PPF is curved due to declining marginal product of labor in each good. The total labor supply is fixed. So as L1 rises, MPL1 falls; corresp
6、ondingly, as L2 falls, MPL2 rises. So PP gets steeper as we move down it to the right.2. The marginal product of labor curves corresponding to the production functions in problem2 are as follows:a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically the wage rate
7、and the allocation of labor between the two sectors.With the assumption that labor is freely mobile between sectors, it will move from the low-wage sector to the high-wage sector until wages are equalized. So in equilibrium, the wage rate is equal to the value of labors marginal product. 2/121 PPMLP
8、3The abscissa of point of intersection illustrated above should be between (20, 30). Since we only have to find out the approximate answer, linear function could be employed.The labor allocation between the sectors is approximately L1=27 and L2=73. The wage rate is approximately 0.98.b. Using the gr
9、aph drawn for problem 2, determine the output of each sector. Then confirm graphically that the slop of the production possibility frontier at that point equals the relative price.Q1Q2L1L2PPF),(22LKQ ),(11LKQ010 21slopeThe relative price is P2/P1=2 and we have got the approximate labor allocation, s
10、o we can employ the linear function again to calculate the approximate output of each sector: Q1=44 and Q2=90.c. Suppose that the relative price of good 2 falls to 1. Repeat (a) and (b).4The relative decline in the price of good 2 caused labor to be reallocated: labor is drawn out of production of g
11、ood 2 and enters production of good 1 ( 1=62, L2=38). This also leads to an output adjustment, that is, production of good 2 falls to 68 units and production of good 1 rises to 76 units. And the wage rate is approximately equal to 0.74.Q1Q2L1L2PPF),(22LKQ ),(11LKQ010 slope21d. Calculate the effects
12、of the price change on the income of the specific factors in sectors 1 and 2.With the relative price change from P2/P1=2 to P2/P1=1, the price of good 2 has fallen by 50 percent, while the price of good 1 has stayed the same. Wages have fallen too, but by less than the fall in P2 (wages fell approxi
13、mately 25 percent). Thus, the real wage relative to P2 actually rises while real wage relative to P1 falls. Hence, to determine the welfare consequence for workers, the information about their consumption shares of good 1 and good 2 is needed. 3. In the text we examined the impacts of increases in t
14、he supply of capital and land. But what if the mobile factor, labor, increases in supply?5a Analyze the qualitative effects of an increase in the supply of labor in the specific factors model, holding the price of both goods constant.For an economy producing two goods, X an Y, with labor demands ref
15、lected by their marginal revenue product curves, there is an initial wage of w1 and an initial labor allocation of Lx=OxA and Ly=OyA. When the supply of labor increases, the right boundary of the diagram illustrated below pushed out to Oy. The demand for labor in sector Y is pulled rightward with th
16、e boundary. The new intersection of the labor demand curves shows that labor expands in both sectors, and therefore output of both X and Y also expand. The relative expansion of output is ambiguous. Wages paid to workers fall. W xPML yPML1w2yOyABb Graph the effect on the equilibrium for the numerica
17、l example in problems 2 and 3, given a relative price of 1, when the labor force expands from 100 to 140. With the law of diminishing returns, the new production possibility frontier is more concave and steeper (flatter) at the ends when total labor supply increases.L1 increase to 90 from 62 and L2
18、increases to 50 from 38. Wages decline from 0.74 to 0.60. This new allocation of labor leads to a new output mix of approximately Q1=85 and Q2=77.6Q1Q2L1L2PPF),(22LKQ ),(11LKQ40140Chapter 41 In the United States where land is cheap, the ratio of land to labor used in cattle rising is higher than tha
19、t of land used in wheat growing. But in more crowded countries, where land is expensive and labor is cheap, it is common to raise cows by using less land and more labor than Americans use to grow wheat. Can we still say that raising cattle is land intensive compared with farming wheat? Why or why no
20、t?The definition of cattle growing as land intensive depends on the ratio of land to labor used in production, not on the ratio of land or labor to output. The ratio of land to labor in cattle exceeds the ratio in wheat in the United States, implying cattle is land intensive in the United States. Ca
21、ttle is land intensive in other countries too if the ratio of land to labor in cattle production exceeds the ratio in wheat production in that country. The comparison between another country and the United States is less relevant for answering the question.2 Suppose that at current factor prices clo
22、th is produced using 20 hours of labor for each acre of land, and food is produced using only 5 hours of labor per acre of land. a. Suppose that the economys total resources are 600 hours of labor and 60 acres of land. Using a diagram determine the allocation of resources.5TF L /TFL /Q)( /F)(LT/ F 2
23、0CCCWe can solve this algebraically since L=LC+LF=600 and T=TC+TF=60.The solution is LC=400, TC=20, LF=200 and TF=40.7LaborLandClothFoodLCLFTC TFb. Now suppose that the labor supply increase first to 800, then 1000, then 1200 hours. Using a diagram like Figure4-6, trace out the changing allocation o
24、f resources.tion).specalz (comlt 0.LF ,T 120,LC 6,T :120L 6.713,9.4.732.6,3,:8LaborLandClothFood0l8000l10000l1200c. What would happen if the labor supply were to increase even further?At constant factor prices, some labor would be unused, so factor prices would have to change, or there would be unem
25、ployment.3. “The worlds poorest countries cannot find anything to export. There is no resource that is abundant certainly not capital or land, and in small poor nations not even 8labor is abundant.” Discuss.The gains from trade depend on comparative rather than absolute advantage. As to poor countri
26、es, what matters is not the absolute abundance of factors, but their relative abundance. Poor countries have an abundance of labor relative to capital when compared to more developed countries.4. The U.S. labor movement which mostly represents blue-collar workers rather than professionals and highly
27、 educated workers has traditionally favored limits on imports form less-affluent countries. Is this a shortsighted policy of a rational one in view of the interests of union members? How does the answer depend on the model of trade?In the Ricardos model, labor gains from trade through an increase in
28、 its purchasing power. This result does not support labor union demands for limits on imports from less affluent countries. In the Immobile Factors model labor may gain or lose from trade. Purchasing power in terms of one good will rise, but in terms of the other good it will decline. The Heckscher-
29、Ohlin model directly discusses distribution by considering the effects of trade on the owners of factors of production. In the context of this model, unskilled U.S. labor loses from trade since this group represents the relatively scarce factors in this country. The results from the Heckscher-Ohlin
30、model support labor union demands for import limits.5. There is substantial inequality of wage levels between regions within the United States. For example, wages of manufacturing workers in equivalent jobs are about 20 percent lower in the Southeast than they are in the Far West. Which of the expla
31、nations of failure of factor price equalization might account for this? How is this case different from the divergence of wages between the United States and Mexico (which is geographically closer to both the U.S. Southeast and the Far West than the Southeast and Far West are to each other)?When we
32、employ factor price equalization, we should pay attention to its conditions: both countries/regions produce both goods; both countries have the same technology of production, and the absence of barriers to trade. Inequality of wage levels between regions within the United States may caused by some o
33、r all of these reasons.Actually, the barriers to trade always exist in the real world due to transportation costs. And the trade between U.S. and Mexico, by contrast, is subject to legal limits; together with cultural differences that inhibit the flow of technology, this may explain why the differen
34、ce in wage rates is so much larger.6. Explain why the Leontief paradox and the more recent Bowen, Leamer, and Sveikauskas results reported in the text contradict the factor-proportions theory.The factor proportions theory states that countries export those goods whose production is intensive in fact
35、ors with which they are abundantly endowed. One would expect the United States, which has a high capital/labor ratio relative to the rest of the world, to export capital-intensive goods if the Heckscher-Ohlin theory holds. Leontief found that the United States exported labor-intensive goods. Bowen,
36、Leamer and Sveikauskas found that the correlation between factor endowment and trade patterns is weak for the world as a whole. The data do not support the predictions of the theory that countries exports and imports reflect the relative endowments of factors.97. In the discussion of empirical resul
37、ts on the Heckscher-Ohlin model, we noted that recent work suggests that the efficiency of factors of production seems to differ internationally. Explain how this would affect the concept of factor price equalization.If the efficiency of the factors of production differs internationally, the lessons
38、 of the Heckscher-Ohlin theory would be applied to “effective factors” which adjust for the differences in technology or worker skills or land quality (for example). The adjusted model has been found to be more successful than the unadjusted model at explaining the pattern of trade between countries
39、. Factor-price equalization concepts would apply to the effective factors. A worker with more skills or in a country with better technology could be considered to be equal to two workers in another country. Thus, the single person would be two effective units of labor. Thus, the one high-skilled worker could earn twice what lower skilled workers do and the price of one effective unit of labor would still be equalized.
