#1. For this question, assume all the technologies are consistent with the model
ID: 2506251 • Letter: #
Question
#1. For this question, assume all the technologies are consistent with the models we have seen in class.
The Kingdom of the North and the Iron Islands produce 2 goods, sords (S) and fish (F). Assume that ports (denoted by P) is a factor to the fish industry, and mines are a factor specific to swords (denoted M). Furthermore, assume White Walker labor (L) is freely mobile across sectors.
Consider the Iron Islands. Holding constant the price of swords, suppose an increase in the price of fish of 75% and the decrease in the White Walker wage is 50%. Determine the impact of these changes on the real rentals on ports and swords by using information below (first you need to figure out the payments to all the factors):
Swords:
Sales Revenue -> PsQs = 10
Payments to White Walker Labor -> WL = 3
Fish:
Sales Revenue -> PfQf = 50
Payments to ports -> RpP = 15
Explanation / Answer
Given For Swords:
Sales Revenue -> PsQs = 10
Payments to White Walker Labor -> WL = 3
if there is increase in the price of fish of 75% and the decrease in the White Walker wage is 50%
=> White walker wage at present = 3*(1-50%)
=3*(1-0.5)
=1.5
So payment to labor =1.5
and as price of fish decreases by 75% => so its sales revenue will decrease by 80% = PfQf*(1-75%)
=50*(1-0.75)
=12.5
As initial profit fr sword = 10-3 =7 and for fish =50-15 =35
=> profit of Fish =5*profit of sword
As labor is moving freely accross sectors, so final profit of Fish =5* finalprofit of sword
=> final profit of sword = (10-1.5) =8.5
and for fish, As we dont know payment to port,let it be X
so profit = (50-X)
=> 8.5 = 3*(50-X)
=> X =47.166
So Finally, payment to port after increase in the price of fish of 75% and the decrease in the White Walker wage is 50%
=47.166
=
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