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

Question

Quizplus · Accepted Answer

Given the price of wheat is $3 per unit, and the price equation for wheat is 1w + 2r = $3. Since the country is labor-abundant, it implies that the wage rate (w) would be relatively lower compared to the rental rate of land (r). Therefore, the labor cost per unit of wheat output (1w) would be lower than the rental cost per unit of wheat output (2r), making $1 for labor cost and $2 for rental cost the correct answer.

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