In the specific factors model, a 5% decrease in the price of food accompanied by a 5% decrease 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) an increase; an increase; an increase
B) a decrease; a decrease; a decrease
C) no change; no change; no change
D) a decrease; an increase; an increase
E) an increase; a decrease; a decrease

Question

Quizplus · Accepted Answer

In the specific factors model, a proportional decrease in the prices of all goods does not change the relative prices, and thus, the distribution of income between factors remains unchanged. This means there is no change in the welfare of labor or the welfare of the fixed factors in the production of food and cloth.

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