Question

Suppose that due to a severe drought in Texas, 100,000 farmers relocate from Texas to Louisiana. Assuming that land and labor are complements in a farming production function, what would happen to the wages earned by workers and the rents earned by landowners in Louisiana

Answer 1

Wages would decrease because the quantity of labor supply increases. The rent earned by Louisiana landowners will increase because the quantity demanded for land will increase.

The law of supply and demand prevails:

1. Wages: when the quantity supplied increases without an increase in the quantity demanded, the price will fall.
2. Rent: when the quantity demanded increases without an increase in the quantity supplied, the price will rise.