The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | }
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following can most reasonably be inferred for the short run after this country opens to free trade?
A)The wage rates in all the sectors of the country will increase.
B)The rental rates of capital in all the sectors of the economy will decline.
C)The wage rates and the rental rates of capital will rise in the bread industry but will fall in the wine industry.
D)The wage rates and the rental rates of capital will rise in the wine industry but will fall in the bread industry.

Question

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following can most reasonably be inferred for the short run after this country opens to free trade?
A)The wage rates in all the sectors of the country will increase.
B)The rental rates of capital in all the sectors of the economy will decline.
C)The wage rates and the rental rates of capital will rise in the bread industry but will fall in the wine industry.
D)The wage rates and the rental rates of capital will rise in the wine industry but will fall in the bread industry.

Quizplus · Accepted Answer

Given that country A is capital-abundant and produces bread and wine, with wine requiring significantly more capital for production, it can be inferred that upon opening to free trade, the country will specialize in wine production due to its comparative advantage in capital-intensive goods. This specialization will increase the demand for capital and its rental rates in the wine industry, while the demand and wages for labor, more intensively used in bread production, will decrease in that sector.

The Following Input-Requirements Data Are for Country A, a Capital-Abundant