derived from (4) is:
χ (г) = [(ι - β) p (г) lχ (г)]1/в А (г)l (г) ,
(5)
where χ (г) is the price of machine ʃ(i). Machines in each sector are produced by
a monopolist. The unit cost of producing any machine is normalized to (1 — β)2.
Together with isoelastic demand (2), this implies that the monopolist in each sector
charges a constant price, χ (г) = (1 — β). Substituting χ (г) and (5) into (4), yields
the quantity produced in sector г as a linear function of the level of technology А(г)
and employed labor l (г):
y (г) = p (г)(1-в)/в А (г) l (г) .
(6)
The linearity of y (г) in А (г) is crucial for endogenous growth, but it is not a sufficient
condition. As it will become clear later on, an expansion of y (г) can reduce its price
р(г) and this can effectively generate decreasing returns. Given the Cobb-Douglas
specification in (4), the wage bill in each sector is a fraction β of sectoral output.
Therefore, equation (6) can be used to find the relation between equilibrium prices
and the wage:
w = βp (г)1/в а (г).
(7)
Since there is perfect mobility of labor across sectors, the wage rate has to be equal-
ized in the economy. Dividing equation (7) by its counterpart in sector j delivers
the equilibrium relative price of any two varieties:
p (г)
P (j)
Г А (j) f
И (г)
(8)
Intuitively, sectors with higher productivity have lower prices. Using (7), integrating
over the interval [0,1] and making use of (3) shows that the equilibrium wage rate
is a CES function of sectoral productivity:
j А (г)в(е-1)
1∕β(e-1)
(9)
More intriguing information
1. Migration and employment status during the turbulent nineties in Sweden2. Standards behaviours face to innovation of the entrepreneurships of Beira Interior
3. THE CHANGING RELATIONSHIP BETWEEN FEDERAL, STATE AND LOCAL GOVERNMENTS
4. THE USE OF EXTRANEOUS INFORMATION IN THE DEVELOPMENT OF A POLICY SIMULATION MODEL
5. Regional Intergration and Migration: An Economic Geography Model with Hetergenous Labour Force
6. The Role of area-yield crop insurance program face to the Mid-term Review of Common Agricultural Policy
7. The name is absent
8. The name is absent
9. Skills, Partnerships and Tenancy in Sri Lankan Rice Farms
10. A Consistent Nonparametric Test for Causality in Quantile