Suppose country Y produces only corn and clothing using only two inputs- land and labor. Production of corn requires an intensive use of land whereas, clothing is a labor-intensive good. If the price of corn increases by 15 percent, the price of clothing remaining constant, the Stolper-Samuelson theorem predicts that in the long run:
A)the rental rate of land will increase by 15 percent.
B)the rental rate of land will increase by more than 15 percent.
C)the wage rate will increase by more than 15 percent.
D)the wage rate will remain unchanged.

Question

Quizplus · Accepted Answer

The Stolper-Samuelson theorem predicts that an increase in the price of a good will lead to an increase in the real income of the factor used intensively in its production, relative to other factors. Since corn is land-intensive, an increase in the price of corn will increase the rental rate of land by more than the price increase of corn, as resources shift towards corn production, increasing the demand for land.

Suppose Country Y Produces Only Corn and Clothing Using Only