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?
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.

Question

Quizplus · Accepted Answer

The value of the marginal product of labor (VMPL) is higher in the manufacturing sector ($5 * 6 = $30) than in the agriculture sector ($1 * 10 = $10). Therefore, firms in the manufacturing sector are willing to pay more for an additional hour of labor compared to firms in the agriculture sector, leading to a shift of labor towards manufacturing.

Suppose That the Wage Is $20 Per Hour in a Two-Sector