Entrepreneurs shift capital and labor across industries in pursuit of profit. Let’s look at this a little more closely. Suppose there are two industries: a high-profit industry, Industry H, and a low-profit industry, Industry L. Answer the following questions about these two industries.
a. If the two industries have similar costs, then what must be true about prices in the two industries?
b. What does your answer to part a imply about the value of the output in the two industries?
c. If labor and capital are moved from Industry L to Industry H, what is given up? What is gained?
d. Suppose instead that the prices in the two industries were identical. In this case, what must be true about the costs in the two industries?
e. What does your answer to part d imply about the amounts of capital and labor required to produce one unit of output in each industry?
f. If labor and capital are moved from Industry L to Industry H, are more units of output lost in Industry L or gained in Industry H?