In the specific factors model, a 5% increase in the price of food accompanied by a 5% increase in the price of cloth will cause ________ in the welfare of labor, ________ in the welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed factor in the production of cloth.
A) a decrease; an increase; an increase
B) a decrease; a decrease; a decrease
C) no change; no change; no change
D) an increase; a decrease; a decrease
E) an increase; an increase; an increase

Question

Quizplus · Accepted Answer

In the specific factors model, if the prices of all goods increase by the same percentage, the real income (and thus welfare) of all factors, including labor and the fixed factors in both sectors, does not change. This is because their purchasing power remains the same relative to the prices of goods.

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