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Use the following information to answer the questions below.  Assume that, as per the normal assumptions of the specific factors model, production of Pants uses labor and capital but no land and production of Soybeans uses labor and land but no capital.

Pants: Sales revenue: Pp . Qp = 150

Payments to labor: W . Lp = 75

Payments to capital: RK . K = 75

Soybeans: Sales revenue: Ps . Qs = 150

Payments to labor: W . Ls = 70

Payments to land: RT . T = 80

Holding the price of pants (Pp) constant, suppose the percentage increase in the price of soybeans (Ps) is 20% and the percentage increase in wage is 5%. [Answer using math and show your work.]

a. Determine the impact of the increase in the price of soybeans on the rental rate of land.

b. Determine the impact of the increase in the price of soybeans on the rental rate of capital.

c. Determine the impact of the increase in the price of soybeans on the welfare (real wage) of labor.

 

Reference no: EM13375049

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