8. Links between factor markets Consider the markets for factors of production,

Question

8. Links between factor markets

Consider the markets for factors of production, such as labor and land, to produce oranges in California in 1935. During this time period—known as the Dust Bowl—major dust storms caused residents of Kansas to migrate west to states like California and Washington.

Using the example of the Dust Bowl, illustrate the effects of this influx of migrants on the market for labor in California on the following graph. Assume the marginal product of workers in California remains the same in spite of the migrant workers.

From the graph, you can deduce that the migration of workers leads the equilibrium wage rate in California to ___________ (INCREASE/DECREASE).

Now consider the effect this change in the labor market has on the land market. In particular, think about the effect of the wage change you just found on the market for agricultural land in California.

Assuming that labor and land are used together in the production of oranges, illustrate this effect on the land market in California on the following graph.

8. Links between factor markets

Consider the markets for factors of production, such as labor and land, to produce oranges in California in 1935. During this time period—known as the Dust Bowl—major dust storms caused residents of Kansas to migrate west to states like California and Washington.

Using the example of the Dust Bowl, illustrate the effects of this influx of migrants on the market for labor in California on the following graph. Assume the marginal product of workers in California remains the same in spite of the migrant workers.

From the graph, you can deduce that the migration of workers leads the equilibrium wage rate in California to ___________ (INCREASE/DECREASE).

Now consider the effect this change in the labor market has on the land market. In particular, think about the effect of the wage change you just found on the market for agricultural land in California.

Assuming that labor and land are used together in the production of oranges, illustrate this effect on the land market in California on the following graph.

Explanation / Answer

Part 1

As the residents of Kansas migrate to California. This leads to a sudden spurt or increase of labor supply of labor causing a rightward shift in the supply curve. It is known since gievn that the marginal product of workers in California remains the same in spite of the migrant workers. This implies that the slope and shape of the supply curve and demand curve reamins unchanged.

So the migration of workers is depicted graphically by a rightward shift in the supply curve such that the new supply curve is to the right of the original supply curve and parallel to it. The extent of righwrad shift depends on the number of labors that migrate. The higher the migration the more is the shift.

The demand curve remaining unchanged the new equilibrium is established at a lower price.

From the graph, you can deduce that the migration of workers leads the equilibrium wage rate in California to ________DECREASE___ (INCREASE/DECREASE).

Part 2

As the wage rate falls as discussed in the previous part, the producers want to produce more. This is so because lower wages imply lower costs and thus higher profits. With an increasing demand for investment to be able to produce more, the demand for labor would increase to meet additional production needs.

Thus, demand for land would rise to produce more. This would be depicted by a rightward shift in the demand curve in the land market, everything else remaining unchanged.

With this shift in the demand curve the new equilibrium is attained at a higher rental rate.

Thus, the migration from Kensas to California affect the land market by increasing the rental rates.

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