1) Suppose that there are two industries, one of which uses a lot of innovations
ID: 1103198 • Letter: 1
Question
1) Suppose that there are two industries, one of which uses a lot of innovations and entrepreneurial talent, while the other is labor intensive and not very innovative. Suppose that a less developed country has a comparative advantage in the latter (more labor intensive and less innovation intensive) industry, so that opening up to trade will lead it to specialize in it, and to lose output (and entrepreneurs) in a more innovative industry to foreign competitors. This will reduce incentives to engage in innovation and entrepreneurship in the home country, and jeopardize its long term growth prospects. Do you agree with this argument? Why? Support your argument with one or two examples (historical or modern).
2) Development of trade had played a big role in setting the stage for the Industrial Revolution and, arguably, Britain could develop it best because it was a unified market. In particular, when transporting goods by rivers, no tariffs were levied when crossing man-made lines (such as county borders), while in France, local authorities would levy tariffs on goods moving within the country across their territories. Think in terms of a simple economic model about the issue above. Specifically, assume that in both England and France transportation of goods is being taxed by monopolists, but in England it is the single monopolist (the British crown) that charges a revenue-maximizing tax on all transportation and no one else can charge an extra tax. In France, in contrast, the monopoly power of taxation is decentralized across multiple localities, each of which aims at maximizing its own revenues from taxation without regard to how it may affect the revenues of other localities. Would you expect the total volume of trade (transportation) to be higher under the British system (one revenue-maximizing tax monopoly) than under the French system (many competing revenue-maximizing tax monopolies)? Why yes or why now? What would happen to transportation (and internal trade) if the number of competing tax-levying monopolies under the French system became large, so that merchants would have to pay tolls every mile or so? Although a good verbal argument would be OK, I encourage (and challenge those of you who want to be challenged) to try to approach the answer by using a formal model. More specifically, you may want to assume linear demand, such as q(p) = a–bp, where q is quantity and p is price. Assume that the marginal cost of providing access to rivers is zero for the monopoly, then formulate and solve two monopoly profit maximization problems, one with a single monopoly and the other for two independent monopolies. A good verbal answer will earn the maximum of 40 points; the last 10 points are reserved for good faith attempts to answer the challenge of a formal model as above.
3) For more than 30 years after World War II, the U.S. and the Soviet Union were the world’s two “superpowers.” Each had some impressive technological achievements (for example, in space exploration) and at some point the Soviet Union had higher levels of output of some basic industrial commodities, such as steel, cement, etc., than the U.S. Nevertheless, after a few decades, the Soviet Union basically stopped growing. Discuss the most important economic reasons why the Soviet Union could not sustain its post-World War II growth in the 1970s and 1980s, while the U.S. could. You should focus your answer on differences between the U.S. and the U.S.S.R. in the ways innovations were generated and implemented in the production process. Relate your argument also to the insights from the Solow growth model.
Explanation / Answer
1- Labor intensive and not very innovative industries are the industries which requires more labor for producing goods so the labor cost is more than the cost of capital.So it focuses more on production and earning larger revenue not focusing on innovation.E.g-Hospitality industry and coal mining industry are the industries, which hold a labor intensive industry. Another industry is uses lot of innovations and entrepreneurial talent and believes in bringing new and modern technology which helps in the development of the country through improved and latest updates and technology , it helps in taking major projects of innovation and development of strategic emerging industries as well as entrepreneurs.it also empowers the market economy. E.g-apple.
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