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Question 1 (Specic Factors Model} Suppose there are two goods, Good A and Good B. Good A uses land and labor as inputs, and Good
Question 1 (Specic Factors Model} Suppose there are two goods, Good A and Good B. Good A uses land and labor as inputs, and Good B uses capital and labor. Labor is mobile across sectors while land and capital are specic factors. The shape of the production function for both goods satises the law ofdtmintshing marginal returns. Let PA and P3 are the output price of Good A and B, MPLA and MPLB the marginal product of labor in each sector, and L A and LB the amount of labor allocated to each sector, respectively. (a) Draw the Production Possibilities Frontier (PPF). What is the slope of the PPF? (b) What is the condition determining the allocation of labor between the two sectors? Can you draw a gure illustrating the allocation? (c) What do you think will happen to the allocation of labor, the nominal wage, and outputs in each sector if rising sea level devoured some of the arable land in Home country? To simplify the analysis, let's suppose rising sea level would not affect the amounts of capital and labor and the output price of Good A and B
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