1. The country of Maroun produces textiles and machinery. The country does not engage in international trade. The production function in both sectors has constant returns to scale. The King of Maroun thinks machinery is a modern sector and he wants to increase the output of machinery in the country. He has decided to offer a subsidy to machinery producers that effectively raises the relative price of machinery.
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3. a) What is the likely effect of this subsidy on the real return to labor and real return to capital in the two sectors in the short run? You may assume that the short run means that labor is perfectly mobile between textiles and machinery, but that capital cannot be transformed instantaneously from one use to another (it is specific to a sector).