K and l are mobile across sectors.

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Reference no: EM13712352

The next three questions pertain to the two-good (M,F)-two-factor (K-L) Harberger model.

Unless noted otherwise, assume that each factor of production is always fully employed, all

markets are competitive, and K and L are mobile across sectors.

5. If the only tax is a tax on capital in M (tKM), the relative price of capital must fall if:

a) the M-sector is relatively labour intensive.

b) the F-sector is relatively labour intensive.

c) the elasticity of substitution between labour and capital in M is zero

d) the elasticity of substitution between labour and capital in F is zero

6. For the above tax (tKM), if the M-sector is relatively labour-intensive, the rental-wage ratio

(r/w) must fall if:

a) the factor-substitution effect is greater than the output effect.

b) the output effect is greater than the factor-substitution effect.

c) the wage rate, w, is above the minimum wage

d) the rental rate, r, is not a fixed number

7. If the only tax in this economy is an output tax on M, the r/w ratio will fall if

a) M-sector is relatively labour intensive

b) F-sector is relatively capital intensive

c) F-sector is relatively labour intensive

d) the capital-labour ratio is fixed in both sectors.


Can someone explain to me the Harberger Model and the answers to these questions?


Reference no: EM13712352

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