Part OneQuestion 1We are in a specific factor world, and we have two factors of production: labour (L)and Capital (K). We have one country, Poland, and one good, vodka. The labourmarket is competitive and wages are set accordingly. Given the (fixed) supply ofcapital, the Marginal Productivity of labour is as follows:Workers Employed123456789101112MPL of last workeradded in the vodkasector1100100090080070060050040030020010050(a) Draw the Marginal Productivity of labour curve. At a wage of $2000 and vodkaprice of $4, how many units of labour will be employed? Explain. What is the totalwage bill (total payment to labour) and the rent paid to capital?(b) Suppose that wages increase from $2000 to $2400. Calculate the change to thetotal wage bill and the change in capital rents. Who are the winners and losers fromthis wage change?See next page From now on suppose that Poland produces not only vodka, but also olives.(c) The factors of production for olives are labour (L) and Land (T). Given the (fixed)supply of land, the Marginal Productivity of labour is the same as in the table for thevodka sector. Assume that initially the price of vodka (Pv), is equal to the price ofolives (Po). Argue that employment is equalized across industries. What is the effectof a fall in the relative price of vodka (Pv/Po) on the allocation of labour and onoutput? Are there both winners and losers from such a price change? Explain.(d) Suppose that the world relative price of vodka (Pv/Po)w is lower than the relativeprice in Poland (Pv/Po). What will Poland decide to export and to import? Whodefinitely gains and loses from trade?

The ability to produce a certain commodity or service at less of an opportunity cost than its…

Part One Question 1 We are in a specific factor world, and we have two factors of production: labour (L) and Capital (K). We have one country, Poland, and one good, vodka. The labour market is competitive and wages are set accordingly. Given the (fixed) supply of capital, the Marginal Productivity of labour is as follows: Workers Employed 1 2 3 4 5 6 7 8 9 10 11 12 MPL of last worker added in the vodka sector 1100 1000 900 800 700 600 500 400 300 200 100 50 (a) Draw the Marginal Productivity of labour curve. At a wage of $2000 and vodka price of $4, how many units of labour will be employed? Explain. What is the total wage bill (total payment to labour) and the rent paid to capital?