In the specific factors model, a 5% increase in the price of food accompanied by a 1% 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) an increase; a decrease; an increase
B) an ambiguous change; an increase; a decrease
C) an ambiguous change; an ambiguous change; an ambiguous change
D) a decrease; an ambiguous change; an ambiguous change
E) an ambiguous change; a decrease; an increase

Question

Quizplus · Accepted Answer

In the specific factors model, the fixed factor in the production of food is land, while the fixed factor in the production of cloth is capital. Therefore, the 5% increase in the price of food will increase the welfare of the owners of land, while the 1% increase in the price of cloth will decrease the welfare of the owners of capital. The effect on the welfare of labor is ambiguous as it depends on the relative size of the two sectors and the elasticity of demand for labor. Therefore, option B is the best choice.

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