Scenario: Farm Country and Industry Country are two neighboring countries. Both countries produce only one good: good X. Production in both countries is a function of total efficiency units of labor and physical capital stock.
-Refer to the scenario above.What will likely happen if there is an increase in entrepreneurial activity in Industry Country?
A) Output will remain bigger than in Farm Country.
B) Income per capita will fall in Industry Country.
C) Productivity in Industry Country will increase.
D) Farm Country will have relatively greater output because its firms face less competition.

Question

Quizplus · Accepted Answer

An increase in entrepreneurial activity in Industry Country will likely lead to an increase in productivity, as entrepreneurs introduce new and innovative techniques and technologies for producing good X. This may lead to a relative increase in output in Industry Country compared to Farm Country, but it cannot be definitively stated that output will remain bigger in Industry Country or that income per capita will fall. There is also no reason to believe that Farm Country will have relatively greater output because of less competition, as both countries produce the same good and are subject to the same market forces.

Scenario: Farm Country and Industry Country Are Two Neighboring Countries