Test

a. If the labor force increases, the the marginal product of labor decreases. Since real wage = marginal product of labor, any labor force increase will decrease the real wages.

b. If some of the capital stock is destroyed the marginal product of capital rises and given that real rental price = marginal product of capital, real rental price will increase in such a situation.

c. Technological advances increases both the real rental price and the real wage as its likely to increase the marginal products of both capital and labor.

d. No effect on real price or wage as it factors out the inflation rate.

Problem #6

a.

Unit of measurement

* Wf = dollar(s)

* Wb = dollar(s)

* Pf = Dollar(s) per farm good

* Pb = Dollar(s) per haircut

* Af = # of farm goods per farmer

* Ab = # of haircuts per barber

b.

If marginal product of farmers increases, then their real wage increases. The real wage is measured in terms of farm goods. That is, if the nominal wage is in dollars, then the real wage is in WF/PF, where PF is the dollar price of farm goods. Real wage is measured in terms of farm goods.

c.

If the marginal productivity of barbers is unchanged, then their real wage is unchanged. The real wage is measured in terms of haircuts. That is, if the nominal wage is in dollars, then the real wage is WH/PH, where PH is the dollar price of a haircut.

d.

If workers can move freely between being farmers and being barbers, then they must be paid the same wage W in each sector.

e.

If the nominal wage W is the same in both sectors, but the real wage in terms of farm goods is greater than the real wage in terms of haircuts, then the price of haircuts must have risen relative to the price of farm goods.

f.

Both groups benefit from technological progress in farming.

If there is technological progress, then the marginal product of labor increases causing the real wages of farmers to go up causing them to consume more haircuts causing the...