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
Suppose country A engages in free trade and the price of cloth increases from $3 per unit to $4 per unit. The price of wheat remains unchanged at $3 per unit. The wage rate and the rental rate change to _____ and _____ respectively._____.
A)$3/8; $7/8
B)$1; $5/3
C)$5/3; $2/3
D)$4/7; $3/7

Question

Quizplus · Accepted Answer

We can use the following equations to determine the new wage rate and rental rate:
4 = 2w + r (new price of cloth)
3 = w + 2r (unchanged price of wheat)
Solving the above equations simultaneously, we get:
w = $5/3 
r = $2/3

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