Assume we have two goods cocoa and steel. Let steel be capital intensive and coc

Question

Assume we have two goods cocoa and steel. Let steel be capital intensive and cocoa labor intensive. In equilibrium the following two zero profit conditions must be satisfied. r* aKS + w* aLS = P_S r* aKC + w* aLC = P_C Where aLC: amount of labor needed to produce a unit of cocoa aKC: amount of capital needed to produce a unit of cocoa aLS: amount of labor needed to produce a steel aKS: amount of capital needed to produce a steel Assuming that the price of steel increases with free trade, illustrate using the equations (1) and (2) above, the impact on r and w

Explanation / Answer

Ps = r *aks +w*als

now since price is increasing that means that amount of capital to produce steel is also directlty increasing ., now if the market prices of steel are not increasing then profit will start decreasing proportioanlly .

Assume that market price are to be kept constant , then we have to increase the labour hours to produce more amount of steel and that could result in increase of profits.

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