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Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile...

Question:

Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows: Automobiles: Sales revenue = 200; payments to labor = 100; payments to capital = 100 Corn: Sales revenue = 100; payments to labor = 40; payments to land = 60 Holding the price of automobiles constant, suppose the increase in the price of corn is 20% and the increase in the wage is 10%.

What is the impact of this on the of land and the rental of capital?

Sales Revenue:

Sales revenue refers to the income which is received by an organization from the process of selling the services and goods. Thus, it is the amount that is realized from the process of selling the services and goods through the normal operations of the business.

Answer and Explanation:

Calculating the impact on the real income of land:

{(100 * 0.20) - (40 * 0.10)} / 60

=> 0.2667 or

=> 26.67%

Thus, the real income of the land has risen due to a rise in the nominal income by 26.67% which is greater in comparison to the change in the price of corn (20%) and the changes in the price of automobiles (0%)

Calculating the impact on the real income of Capital:

{(200 * 0%) - (100 * 0.10)} / 100

=> 0.10 or

=> 10%

The real income of the capital has declined due to the fall in the nominal income by 10% which may be less in comparison to the changes in prices of either automobile or corn. Therefore, as the nominal income of labor increases by 10% which is less in comparison to the changes in the price of corn and greater than the automobiles. Thus, it is a situation of uncertainty as it is not clear how important the goods may be for the consumption of labor.


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How to Calculate Sales Revenue: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 27
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