Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
If the initial prices of wheat and cloth are $3 per unit then:
A)both the wage rate and the rental rate are equal to $1.
B)the wage rate and the rental rate are $1 and $2 respectively.
C)the wage rate and the rental rate are $2 and $3 respectively.
D)both the wage rate and the rental rate are equal to $2.

Question

Quizplus · Accepted Answer

Given the initial prices of wheat and cloth are both $3 per unit, setting up equations based on the given price formulas and solving simultaneously shows that both the wage rate (w) and the rental rate (r) must be $1 to satisfy both equations.

Suppose Country A, a Labor-Abundant Country, Produces Only Wheat and Cloth