QUESTION
rephrase economic
Summer 2020
CLASS TAKE-HOME ASSIGNMENT
CARLETON UNIVERSITY
Department of Economics
Econ 3870V
Instructor: R. Carson
COVERAGE: Chs. 4, 5, and pp. 188-200 of Ch. 6.
Directions:
Please do each question below. The question weights, which add to 100%, are as
indicated. Use graphs where you find them useful, but be sure to explain
them. In general, be sure to explain yourself well enough that the grader
understands you and knows that you know what you are doing. Finally, please
type your answers double spaced, with adequate margins. Please draw your graphs
neatly and legibly. Illegible answers will be considered incorrect. Bonne Chance!
Good luck!
1a. (30%). In 1970, the economic historian, Evsey Domar, said that it would be
impossible to have at one and the same time "free" land, "free" labour, and a landowning
aristocracy. If "free" land means land that is in excess supply—and
therefore has a zero price—and "free" labour means labour that is free of bondage,
explain why this combination would be impossible.
1b. (5%). Show that there is a labour theory of value when land is “free” in the
sense of “free” land above. That is, show that the total value of output equals the
value contributed by labour. (Hint: A unit of labour can be said to contribute the
value of its marginal product to output value.)
1c. (10%). If land is “free,” what three organizations of an agrarian economy are
possible? Show that these three are the only possibilities. If bondage arises in
conditions where land is “free,” what basic change in economic conditions could
bring about its peaceful demise? Would the result necessarily be to make labour
better off? Explain briefly.
- (15%). What is meant by the "scattering of strips" in agriculture in medieval
Europe? Explain how this was a response to conditions existing in Europe during
the Middle Ages and what its advantages were under these conditions. (Please
give two different advantages.) What factors would cause this practice to
disappear?
3a. (30%). Suppose a firm introduces a profitable innovation that reduces
production costs. As a result, rival firms suffer wealth losses, and some will go out
of business, although historically, the old production methods usually survive for a
time before disappearing completely.
Show that society receives a net gain from this innovation in the sense that its net
benefits to society are positive, even if we don’t count the innovator’s profits and
even if the innovator is able to exercise some market power after innovating.
(Hint: Think in terms of consumer and producer surplus.)
3b. (10%). Given that the net benefits of the innovation are positive, why might a
government still want to suppress the innovation? (Hint: Does a government
consider all consumer and producer surplus to be equal? How might this relate to
the nature of the political system?)
Question 1
- This combination is impossible because when land is free there is no aristocracy due to lack of ownership of land. Aristocrat will exercise their power in some other form. They would subjugate populace as slaves. Again labor will not remain free they will become slaves. Therefore the above mentioned combination is not just possible.
- There is labor theory of labor when there is free land. Labor theory states that value of output is determined by the value of labor. Value of output which is price, p, is equal to value contributed by labor is wage divided by marginal product of labor. If it is not such and say if p is greater the w/MP then there is more profit opportunities left which can be enjoyed by hiring more labor. If P is smaller than w/MP then cost of labor is greater than revenue. But if land is not free then this equality does not hold because then value of output will depend on cost of land also.
- c) Three possible organizations are aristocrat, serfs and self-employed labor. These three organizations are only possible. If land is free then labor is bound to be slaves as we discussed in impossibility in part a. There will be a aristocrat class exerting control over others by making them slaves. The third will be the class who produces food for themselves only. If bondage arises in conditions where land is free then economic conditions will be worse. Cost of production will increase as now total cost production will include cost of labor and cost of land. Increase in production discourages producers to produce more. This will directly affect labor. Sudden increase in land will be compensated by decrease in wage rate of labors and as a result labor would become worse off.
Question 2
“Scattering of strips” was a practice adopted for farmers in manor during the era mentioned in the question. Here, lands, good for farming were owned by a particular farmer were scattered across the manor. As per this rule, cultivated areas of land were surrounded by non-farming areas. Thus, each peasant or farmer had the combination of good land as well as non-farming land area. The practice of “Scattering of strips” were applicable n all the farmers of Manor.
During middle ages, each Manor had lords and cultivable lands were limited for manor. It caused them to work together as a joint ownership. Lord kept some part of the land for his own use and rest of the land were distributed to peasants. Distribution was scattered rather at one place as a compact area. Advantages are harvesting same crop by all peasants in a manor and sowing and reaping at the same time. The factors for disappear of this practice are different economic and social status of peasants, different choice and preference for crops and prominence of individual farming.
Question 3
- The innovation that reduces the production costs can increase both the consumer surplus and producer surplus. In terms of the consumer, they can receive the products at the lower cost. Holding the willingness to pay the same, the consumer surplus will increases. In terms of the producer, as long as it can provide the product at the lower price than other producers’ cost, it can hold the market power. The producer surplus should increase as well. Both leads to the increase in the increase of net benefits.
- Since some of the producer will leave the market because of the loss resulted from innovation, it may lead to the monopoly in the market which may affect the government control on the specific industry. Thus, the government still do not want to suppress the innovation and stabilize the economic system, providing enough producer surplus to the producers.
Assignment
1a. If land has a zero price and labor has total mobility, then a land-owning aristocracy has no wealth and no capacity to force labor to pay them rent to work the land they own. Thus the land-owning aristocracy disappears. If labor has total mobility and land-owning aristocracy, since the aristocracy will make money from land, then land will not be free. If land has a zero price and land-owning aristocracy, since the aristocracy will make money from labor, labor has no mobility.
1b. The value of output is determined by the value of land and labor. Under the situation of the free land, the value of output is only determined by the value of labor which equals to the marginal product per labor times the wage.
1c. If land is free, then labor is bound to be slaves. Therefore, there are only three organizations, aristocrat, serfs and self-employed labor. The first two organizations indicate that the aristocrat class have fully control over the labor while the last organization indicates that these labor only produce for themselves. When the bondage arises, the cost of production increases. In order to increase the profits, the labor will be asked to produce more and reduce the wages. It will harm the economic situation as well as the labor would become worse off.
- The landlord has various fields and divide it into different strips. These will be cultivated by the tenants who pay the rents. The landlord receives the rent and pass through the land right to next generations. During the Middle Ages in Europe, the population experienced a fast expansion and because of the shortage of the labor, some farmland is empty. The scattering of strips methods can ensure that all the land can be cultivated and everyone can have land to produce as long as he is willing to do. However, with the capitalism and the privatization, the system disappeared.
3a. The reduction in production costs will reduce the market price and thus increase the consumer surplus. When the rival firms suffer wealth losses, the producer surplus decreases in those rival firms. However, no matter if these companies go out of business, the companies with lower cost can enjoy higher producer surplus. Thus, the net benefits to society are positive.
3b. The government may focus on the producer surplus rather than the consumer surplus. The producers are the key determinants of the economic performance and also relate to the job opportunities. If the cost production innovation can reduce the amount of job needed. The industry will suffer from the serious unemployment and may lead to the recession in consumption as well as the society instability.
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| Subject | Economics | Pages | 6 | Style | APA |
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Answer
Assignment
Question 1a
Having “free” land and “free” labor simultaneously would be impossible because making land free creates a condition where ownership of land disappears, and thus there is no land-owning aristocracy. Similarly, when labor has total mobility, aristocrats will strive to maintain power by subjugating people as slaves. As such, labor will not be free since people will become or be treated as slaves. Also, if land is free and has ownership autocracy, labor will lack mobility as the autocracy will strive to use labor as a source of money. This implies that having a situation where both land and labor are free and land has ownership autocracy is impossible.
Question 1b
According to the labor theory, the value of output is a function of the value of land and labor. In other words, the value of output, given as price, equals the value of labor divided the marginal product of labor. In situations where the land is free, however, the output value can only be determined by the value of labor, which is equivalent to the marginal product per labor multiplied by the wage.
Question 1c
Free land means that people to provide labor are bound to be treated as slaves. As such, the only three organizations that are possible are aristocrat, serfs and self-employed labor. Aristocrat and serfs organizations imply that that the aristocrat class will tend to exert control over those providing labor to make them slaves, whereas the last organization, self-employed, suggest that offering labor will only produce for themselves. If the aristocrats class exercise bondage in situations where land is free, then the cost of production will rise significantly and organizations will strive to increase profits by reducing wages.
Question 2
“Scattering of strips” refers to a practice where farmers, during the middle ages in Europe, divided/scattered their lands into different strips across the manor. The strips were then leased to tenants who pay rent for their cultivation. According to the rule, cultivable lands were surrounded by non-farming farmlands to ensure that each farmer had a combination of arable land and non-cultivable land. This way, the method ensured that everyone had access to good land which they could cultivate. The system was, however, killed by the emergence of privatization and capitalism.
Question 3
Question 3a
The principal objective of innovation is to reduce production costs because by being innovative, firms can improve the efficiency of their production processes, set lower market prices, and consequently increase consumer surplus. When a firm sets below average market prices, consumers receive products and services at lower prices, thereby increasing consumer surplus. For rival firms, they suffer wealth losses, which leads to reduced producer surplus in the firms. This is because firms that adopt/implement price cuts are more likely to hold and control the market power. If the rival companies are pushed out of the market, however, firms with lower costs enjoy increased producer surplus, leading to positive net benefits.
Question 3b
Innovation that acts as an incentive for a firm to push rivals out of the market can create monopolies in the market economy, which would allow the firm to control market prices and other market conditions. For this reason, the government might want to suppress such innovation. The government will also want to regulate innovation by particularly focusing on producer surplus if the innovation threatens job opportunities, by for example, replacing human labor and causing massive job losses.
References