Suppose demand conditions in industries X and Y are identical but that productiv

Question

Suppose demand conditions in industries X and Y are identical but that productivity increases by 5% in industry X and 2% in industry Y. If economy-wide productivity and the average wage each rise by 3%, we should expect that:

a. output and employment in X will increase relative to Y

b. output and employment in X and Y will not change relative to one another, since wages will increase by 5% in X and 2% in Y

c. output and employment in Y will increase relative to X

d. no statement can be made concerning output and employment in either industry without more information

Explanation / Answer

b. The above statement is totally correct. From the equilibrium condition of labour demand we know real wagw(W/P=w, W=nominal wage, P=nominal price) is equal to marginal product of labour.

So, W/P=MPL=z (let)

Therefore, dlogW-dlogP=dlogZ

or, dlogW-dlogz=dlogP=0 iff dlogW=5% for X and 2% for Y as dlogz=5% for X and 2% for Y. Hence, it is the correct answer.

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