In the two-sector (manufacturing and agriculture) specific-factors model, an increase in the price of manufactured goods will cause a(n):
A) increase in the real rental of capital.
B) decrease in the real rental of capital.
C) change in the real rental of capital.
D) decrease in the nominal wage in the manufacturing sector.

Question

Quizplus · Accepted Answer

In the specific-factors model, an increase in the price of manufactured goods increases the demand for capital in the manufacturing sector, which is a specific factor in this sector. This leads to an increase in the real rental rate of capital.

In the Two-Sector (Manufacturing and Agriculture) Specific-Factors Model, an Increase