Consider a factor-specific model with capital (K) being specific to manufacturing and land (L) to agriculture. Use the following information to answer the questions below.
Manufacturing: Sales revenue: PQ = 400
Payments to labor: WL = 200
Payments to capital: RK = 200
Agriculture: Sales revenue: PQ = 180
Payments to labor: WL = 80
Payments to land: RT = 100
Holding the price of manufacturing, output quantities in each sector, and the amounts of factors employed in each sector constant, suppose the decrease in the price of agriculture is 4% and the decrease in the wage is 2%. Wherever possible, please provide numerical answers.
a. What is the corresponding percentage change in the nominal rental rate of capital?
b. What is the corresponding percentage change in the real rental rate of capital in terms of agriculture?