ISI ME II 2011 Discussion

[Dr. Strange]

http://economicsentrance.weebly.com/uploads/1/1/0/5/1105777/msqe2011.pdf

In Q7 of Eco part, I am having trouble in all parts except the first i.e what happens when land becomes free, how to measure welfare and so on. Need help .Thanks in advance.

[Akash]

Without prices for capital or labour, how can you write a maximization. The profit function for both firms would be monotonically increasing. Only condition can be that MP of labour in M = MP of labour in F. This solves part a.

For part b) we need to have some idea of cost of capital to arrive at anything. How did you think it through?

If I had a gun to my head, i would say part b also has the same allocation as a because M has no use for Land(T). The subsequent questions on welfare differences would then be moot.

[urvashi]

IM GETTING 50 EACH FOR PART a and for part b i think going by the production function since the share of land in total output is fixed at 1/2 land becoming free may not have any affect on the equilibrium employment

[Dr. Strange]

Second part of question seems like an open ended Shutter Island or Inception movie.
Nonetheless I have tried to fit a crazy theory.

The bone of contention seems to be   the ownership of land and the consequence of land being free . 3 Cases may be possible:

Case 1: Land being free means land is owned by government. In that case the part becomes similar to the previous part where land was owned by landlords and all answers should be same.

 
Case 2: Land being free means land is owned by none. No one can grow anything and food production is 0. This scenario is highly unlikely.

Case 3: Land being free means land is divided equally among its citizens. A crude approximation being each labourer is given 0.49 units of land (capitalists are excluded) and thus each labourer can get minimum of (0.49)^.5   * 1^0.5 = 0.7 as income.

So wage of labour in manufacturing should be atleast 0.7
Optimising for capitalists Lm comes 18.36 and rest 71.64 labour in production of food.

Suggestions are welcome.