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Suppose we have two sectors: MANU and AG. Capital is specific to MANU and Land specific to AG. Labour is mobile. Prices are given.

a) What do we mean by Labour market equilibrium in this model? Show the equilibrium using the ‘Leontief Box’ diagram below and explain why it is the equilibrium.

b) Show/depict how to find total payments to labour, returns to the owner of capital and returns to owners of land.

c) How do we calculate GDP at equilibrium? Prove that the equilibrium maximizes GDP.

Sample Solution

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