21.7 In the early 1960s President John Kennedy's Council of Economic Advisers recommended the institution of "Wage-Price Guideposts." The basic idea of the guideposts was to require wages in all industries to increase at the rate at which the national level of output per worker increases (about 3.2 percent per year). Some industries would have had rates of productivity increase of less than 3.2 percent. These industries were to be permitted to increase prices to the extent that their productivity increase fell short of the national average. On the other hand, firms that had productivity increases in excess of the national average were expected to reduce their prices to the extent of this excess.

Adherence to these rules was intended to keep prices constant on a nationwide basis.

There were numerous exceptions to these general principles, but assume for the purposes of this problem that these were not important. Assuming the Wage-Price Guideposts were legislated as an unbreakable law, answer the following questions:

a. What would happen to the relative factor shares in each industry over time?

b. What does this implicitly assume about the elasticity of substitution in all industries?

c. What effect would this legislation have on the investment of new capital if industries did not obey the assumption discussed in part

(b) ?

d. In regard to your answer to part (c), what effects do you think the guideposts would have on economic growth?