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. What will happen to the distribution of labor between the two sectors?

Answer 1

Options :

A) Nothing will happen. The current allocation of labor between the two sectors is ideal.

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

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

D) Both the agricultural and the manufacturing sector will demand more labor at the current wage.

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

Explanation: Analysing the marginal product of labor for the TWO sectors ; the manufacturing and agricultural which measures the change in production output as labor is increased. The output produced by increasing labor is 6units for manufacturing and 10 units for agricultural, agricultural seems greater, however, comparing output with the price per unit of product, manufacturing and agricultural sells for $5 and $1 respectively. Meaning manufacturing generates ($5 * 6) = $30 while agricultural generates ($1 * 10)) $10 per increase in number of Labor.

Therefore, at the current wage of $20, revenue made by hiring one more unit of labor into the agricultural sector cannot even cater for it's wage. Therefore, agricultural sector will demand less while manufacturing will demand more.