Use the following information to answer the questions below:
Manufacturing: Sales revenue = PM • QM = 150
Payments to labor = W • LM = 100
Payments to capital = RK • K = 50
Agriculture: Sales revenue = PA • QA = 150
Payments to labor = W • LA = 50
Payments to land • RT • T = 100
Holding the price of manufacturing constant, suppose the increase in the price of agriculture is 10% and the increase in the wage is 5%.
a. Determine the impact of the increase in the price of agriculture on the rental on land and the rental on capital.
b. Explain what has happened to the real rental on land and the real rental on capital.