In the specific factors model, a 0% increase in the price of food accompanied by a 5% increase in the price of cloth will cause wages to ________, the production of cloth to ________, and the production of food to ________.
A) increase by more then 5%; increase; remain unchanged
B) increase by less then 5%; increase; decrease
C) remain constant; decrease; decrease
D) increase by 5%; remain unchanged; remain unchanged
E) remain constant; increase; increase

Question

Quizplus · Accepted Answer

In the specific factors model, if the price of cloth increases while the price of food remains constant, resources (labor) will move towards the cloth-producing sector due to higher returns, increasing the production of cloth. This shift in labor reduces the labor available for food production, thus decreasing it. Wages will increase but by less than the 5% increase in the price of cloth, as the wage change reflects a weighted average of the price changes in both sectors, and only one sector's price has increased.

In the Specific Factors Model, a 0% Increase in the Price