Question

For the remaining questions, consider a specific-factors model in which capital is fixed in two sectors (soybeans and computers), and labor is mobile. “Left” and “right” below refer to a Ricardo-Viner diagrams in which soybeans are on the left axis and computers on the right axis.

1. If the price of computers goes down then, (a) the MPLs increases

(b) the VMPLs increases (shifts up) and the VMPLc decreases (shifts down). (c) the MPLc decreases
(d) the VMPLc decreases and the VMPLs stays the same.
(e) everything remains the same.

[Hint: remember, the MPL is the Marginal Product of Labor, and traces out the marginal quantity of output of an additional unit of labor as a function of capital allocated to that sector and productivity in that sector. .The VMPL is the Value Marginal Product of Labor, is the price of a sector multiplied by the MPL in that sector, and corresponds to the labor demand curve, tracing out the marginal revenue produced by an additional unit of labor, as a function of capital and productivity in a sector.]

2. If the price of computers goes down then,

(a) the MPKs increases.

(b) the VMPKs increases and the VMPKc decreases.
(c) the MPKc increases.
(d) the VMPKc decreases and the VMPKs stays the same.

(e) (a) and (b)

[Hint: as above, except the marginal product of capital is a function of the amount of labor allocated to that sector and productivity in a sector.]

3. If the price of computers goes down then,
(a) workers leave the computer sector for the soybean sector

(b) workers leave the soybean sector for the computer sector

(c) workers do not reallocate between sectors
(d) workers’ nominal wages are unchanged
(e) none of the above

4.If the price of computers goes down then,
(a) capital leaves the computer sector for the soybean sector

(b) capital leaves the soybean sector for the computer sector

(c) capital does not reallocate between sectors
(d) capital’s nominal wages are unchanged
(e) none of the above

5. If the price of computers goes down then,
(a) the return of computer-specific capital falls
(b) the return of soybean-specific capital (farmland) falls

(c) the return of computer-specific capital rises
(d) the return of soybean-specific capital (farmland) rises

(e) (a) and d)
(f) (b) and (c)

Answer 1

1.C

2.A

3.C

4.A

5.D

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