Consider an economy that produces tea and rice. Each requires a different type of land, so the flat, low-lying flood lan

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Consider An Economy That Produces Tea And Rice Each Requires A Different Type Of Land So The Flat Low Lying Flood Lan 1 (620.45 KiB) Viewed 49 times

Consider an economy that produces tea and rice. Each requires a different type of land, so the flat, low-lying flood land used for rice is a factor specific to rice and the hilly land used for tea is specific to tea. However, labor can move freely between the two sectors, so that the wage paid to labor in both sectors is the same. Suppose the marginal product of labor in the tea sector is given by 150-2L", where L' is the number of workers in the tea sector, and the marginal product of labor in the rice sector is given by 120-LP, where LP is the number of workers in the rice sector. Suppose that there are 120 workers, 100 rice farmers, and 100 tea growers in the economy. Assume that the economy is a net importer of rice. a. If the world price of tea and the world price of rice are both $1 per unit, and if the country has a free-trade policy so that the domestic price of each good is equal to the world price, find the equilibrium allocation of labor to each sector, the quantity of each good produced in this economy, and the wage. Hint: remember the quantity produced can be calculated as the area underneath the marginal productivity of labour curve. [5 points) b. Now, suppose the government imposes a 75% ad valorem tariff on rice imports, rising its domestic price to $1.75. Repeat the analysis of part (a). [5 points] c. Disregarding tariff revenue, who among workers, rice farmers, and tea growers, benefits from the tariff in terms of real income? Who is hurt? Is there any group for which you cannot tell? Derive and draw the budget lines for workers before and after the tariff. [5 points) d. Suppose we added one more piece of information: All consumers in this economy have Leontieff preferences, so that they always consume 4 units of rice for every unit of tea that they drink. Does that change your answer to (c)? [5 points) e. Suppose total consumption of Rice after the tariff becomes 8500. Calculate the amount that is imported and the corresponding tariff revenues. Suppose these revenues are integrally redistributed to the 120 workers. Draw their new budget line. Does that change your answer to (d)? [5 points) f. Would an export tax or an export subsidy on tea yield similar outcomes? What rate would achieve the exact same consequences as the tariff on rice? [5 points)