Question

29) In the specific factors model, a 0% increase in the price of food accompanied by 5% increase in he price of cloth will cause wages to food to A) increase by more then 5%; increase; remain unchanged B) increase by less then 5%; increase; decrease C) remain constant; decrease; decrease D) increase by 5 % ; remain unchanged; remain unchanged E) remain constant; increase; increase , the production of cloth to and the production of В 30) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If there is an increase in the wage rate, the new equilibrium is most likely to be A) point e B) point d C) point b D) point h E) point f 31) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If the labor supply increases due to immigration, the new equilibrium is most likely to be A) point f B) point d C) point b D) point e. E) point h 32) The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units of food. When the central city, Mudhole, puts in an airstrip, the country is able to engage in trade. If the relative price of cloth in the outside world is 3 units of food, then Moribundia will export and will benefit. factors used in the production of A) cloth; mobile; cloth B) food; mobile; food C) food; immobile; cloth D) food; immobile; food E) cloth; immobile; cloth

Answer 1

29) when the price of cloth increases with no increase in food. There will be increase in the wages by less than 5% because the decrease in production of food will release the labour but unavailability of the extra capital needed will hamper the increase in marginal product by 100% and therefore the wage will rise by less than 100% equivalent to increase in price. Production of clothbincrease because it is more profitable to produce cloths. The production of food decrease.

The correct option is (b).

30) the correct option is (b). The increase in wages will increase production of cloth while that of food will fall. This is because the production of food is labour intensive. So we will move from e to d where production of cloth increases.

31) increase in labour force due to immigration wi increase the endowment of labour in the economy which will shift the production possibility curve outwards. Thus we move to point h. Thus the correct option is (e).

32) the world relative price of cloth is less than the domestic price of cloth which means that the economy will engage in export of food , because engaging in export of cloth is not profitable. Thus the immobile factor which is labour used in production of food will benefit from the trade. Thus the correct option is (d).