Marginal Cost Composition in the Adapted WS-PS Model
In the adapted Wage-Setting/Price-Setting (WS-PS) model that includes foreign inputs, a firm's marginal cost is composed of both domestic labor costs (wages) and the cost of imported materials. This is an expansion from the basic model where marginal cost only reflected wages.
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Introduction to Macroeconomics Course
Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Impact of Imported Materials on Firm's Marginal Cost
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Marginal Cost Composition in the Adapted WS-PS Model
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Learn After
A firm produces a final good using two primary inputs: labor hired from the domestic market and a specific component imported from a foreign country. The price of the imported component is fixed in the foreign currency. If the domestic currency depreciates (loses value) relative to the foreign currency, what is the direct and immediate effect on the firm's marginal cost of production, assuming domestic wages remain constant?
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In an economic model where a firm's production requires both domestic labor and imported raw materials, an increase in the price of the imported materials will not affect the firm's marginal cost as long as domestic wages remain constant.