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, the labor cost per unit of cloth output is _____ and the rental cost per unit of cloth output is _____.
A)$3; $1
B)$1; $2
C)$2; $1
D)$1; $3

Question

Quizplus · Accepted Answer

Labor cost per unit of cloth output = (2/1)w = 2w
Rental cost per unit of cloth output = (1/1) r = r
From the given equations, we know that Price of wheat = 1w + 2r = $3
Therefore, 1w = $3 - 2r
Substituting this value in the labor cost equation:
Labor cost per unit of cloth output = 2w = 2($3 - 2r) = $6 - 4r
From the given initial prices, we know that Price of cloth = 2w + 1r = $3
Substituting the value of 1w from above:
2($3 - 2r) + 1r = $3
Solving for r, we get:
r = $1
Substituting this value, we get:
Labor cost per unit of cloth output = $6 - 4($1) = $2
Therefore, the labor cost per unit of cloth output is $2 and the rental cost per unit of cloth output is $1. The best choice is C.

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