Question 1 (26 points) Consider a country called Bonampak. Suppose that the total amount of arable land in this country considerably increased from 7 to T'. Use the short-run specific-factors model to analyze the effects of this increase in the stock of land. Assume that land is specific to agriculture, capital is specific to manufacturing, and labor is free to move between the two sectors. (a) Construct a diagram of the labor market and show how the equilibrium nominal wage, and the quantity of labor used in each industry changed due to the increase in the total stock of land. Label the starting equilibrium as point A, and the equilibrium after the increase in the stock of land as point B. (8 points) (b) What was the effect on the real rental rate of capital and the real rental rate of land. Justify your answer. (5 points) Environmental agencies across the world, detected that the increase in Bonampak's stock of land was mainly because farmers were burning vast regions of the rainforest to clear the land. In retaliation for these practices, the international community is considering imposing severe economic sanctions. One of them is to decrease their investment in physical capital (FDI) in Bonampak. (c) Construct a similar labor market diagram as the one in question a), to show the effect on the equilibrium nominal wage, and the quantity of labor used in each industry due to the decrease of FDI in Bonampak. The starting point in this question is point B previously obtained in a), label the equilibrium after the decrease in FDI as point C. (8 points) (d) What was the effect of the outflow of FDI on the real rental rate of capital and the real rental rate of land? Justify your answer. (5 points) Question 1 (26 points) Consider a country called Bonampak. Suppose that the total amount of arable land in this country considerably increased from 7 to T'. Use the short-run specific-factors model to analyze the effects of this increase in the stock of land. Assume that land is specific to agriculture, capital is specific to manufacturing, and labor is free to move between the two sectors. (a) Construct a diagram of the labor market and show how the equilibrium nominal wage, and the quantity of labor used in each industry changed due to the increase in the total stock of land. Label the starting equilibrium as point A, and the equilibrium after the increase in the stock of land as point B. (8 points) (b) What was the effect on the real rental rate of capital and the real rental rate of land. Justify your answer. (5 points) Environmental agencies across the world, detected that the increase in Bonampak's stock of land was mainly because farmers were burning vast regions of the rainforest to clear the land. In retaliation for these practices, the international community is considering imposing severe economic sanctions. One of them is to decrease their investment in physical capital (FDI) in Bonampak. (c) Construct a similar labor market diagram as the one in question a), to show the effect on the equilibrium nominal wage, and the quantity of labor used in each industry due to the decrease of FDI in Bonampak. The starting point in this question is point B previously obtained in a), label the equilibrium after the decrease in FDI as point C. (8 points) (d) What was the effect of the outflow of FDI on the real rental rate of capital and the real rental rate of land? Justify your answer. (5 points)
