In the specific factors model, a 5% increase in the price of food accompanied by a 0% increase in the price of cloth will cause wages to ________, the production of cloth to ________, and the production of food to ________.
A) remain constant; decrease; decrease
B) increase by less then 5%; decrease; increase
C) remain constant; increase; increase
D) increase by more then 5%; increase; remain unchanged
E) increase by 5%; remain unchanged; remain unchanged

Question

Quizplus · Accepted Answer

The specific factors model assumes that labor is specific to certain industries and capital can move between industries. A 5% increase in the price of food means that capital will move towards the food industry, causing an increase in the production of food. However, since labor is specific, the supply of labor in the food industry will remain constant, causing wages to increase by less than 5%. The increase in the price of food will also cause a decrease in the demand for cloth, leading to a decrease in the production of cloth.

In the Specific Factors Model, a 5% Increase in the Price