Question

Suppose that the wage is $20 per hour in a two-sector (manufacturing and agriculture) specific-factors model. Currently, the prices of manufactured and agricultural outputs are $5 and $1, respectively; the marginal product of labor in the manufactured sector is 6 units per hour; and the marginal product of labor in the agricultural sector is 10 units per hour. The value marginal product of labor is hence higher in one sector, so this cannot be an equilibrium. What will happen to the distribution of labor between the two sectors?

Answer 1

The manufacturing sector will demand more labor, and the agricultural sector will demand less labor at the current wage.