The entire economy consists of two industries, Industry 1 and Industry 2. Their production functions are as follows: Y1 = A1K1^1/3L1^2/3 and Y2 = A2K2^1/3L2^2/3 Assume that the price, P1, and P2, A2, K1, and K2 are fixed. [1a] Suppose that A1 = 3, K1 = 1280, L1 = 20, P1 = 30, A2 = 2, K2 = 1080, L2 = 40, P2 = 60. Calculate w1 and w2. If A1 increases from 3 to 6, what is the new nominal wage rate offered by Industry 1? If Industry 2 offers the same wage rate, what is the new quantity of labor Industry 2 hires? How much does the output of Industry 2 fall? [Hint: K1, L1, P1, A2, K2, and P2 stay unchanged] [1b] According to part [d], how many jobs does Industry 2 lose? Which type of unemployment is this? Is the entire economy better off or worse off in the short run due to the increase in A1? How to prove it? What about the long run? [1c] If the people in the economy still want the same amount of output which used to be produced by Industry 2, what should they do? Is your conclusion consistent with the statement that foreign competition kills jobs in the United States? Briefly explain. [1d] Consider the situation that the unemployment rate of the economy has already been high. Briefly explain how it would change your conclusions above. Does this provide the justification for trade protection policies?
Please answer all 4 subparts, Thank You!
The entire economy consists of two industries, Industry 1 and Industry 2. Their production functions are as follows:
Y1 = A1K1^1/3L1^2/3 and Y2 = A2K2^1/3L2^2/3
Assume that the price, P1, and P2, A2, K1, and K2 are fixed.
[1a] Suppose that A1 = 3, K1 = 1280, L1 = 20, P1 = 30, A2 = 2, K2 = 1080, L2 = 40, P2 = 60. Calculate w1 and w2. If A1 increases from 3 to 6, what is the new nominal wage rate offered by Industry 1? If Industry 2 offers the same wage rate, what is the new quantity of labor Industry 2 hires? How much does the output of Industry 2 fall? [Hint: K1, L1, P1, A2, K2, and P2 stay unchanged]
[1b] According to part [d], how many jobs does Industry 2 lose? Which type of
[1c] If the people in the economy still want the same amount of output which used to be produced by Industry 2, what should they do? Is your conclusion consistent with the statement that foreign competition kills jobs in the United States? Briefly explain.
[1d] Consider the situation that the unemployment rate of the economy has already been high. Briefly explain how it would change your conclusions above. Does this provide the justification for trade protection policies?
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