China has 1,000 units of capital and 3,000 workers. The United States has 3,000 units of capital and 1,000 workers. Clothing production is labor intensive and chemical production is capital intensive. Suppose that the United States eliminates all restrictions on immigration and Chinese workers are free to emigrate from China to the United States. How many Chinese workers must emigrate from China to the United States in order for factor price equalization to occur?
A) 1,000
B) 2,000
C) 3,000
D) 4,000

Question

Quizplus · Accepted Answer

Factor price equalization occurs when the wage rate in both countries converges and the rental rate for capital also converges across countries. In this scenario, clothing production is labor-intensive, so the wage rate in the US will increase as Chinese workers migrate to the US in search of higher wages. At the same time, chemical production is capital-intensive, so the rental rate for capital in China will increase as the capital is in short supply relative to labor.

In order for factor price equalization to occur, the wage rate in the US and the rental rate for capital in China must be equal. Assuming that the rental rate for capital in the US is already higher than in China, the wage rate in the US must fall to equalize with the rental rate for capital in China. This implies that Chinese workers must migrate to the US until the wage rate in the US falls to the level that is equal to the rental rate for capital in China. Since there are 3,000 workers in China and 1,000 workers in the US, the wage rate in the US must fall to one-third of the Chinese wage rate, which occurs when 2,000 workers from China migrate to the US. Therefore, the answer is B.

China Has 1,000 Units of Capital and 3,000 Workers