Question

4. In the specific-factors model, assume that the price of agricultural goods decreases while the price of manufactured goods is unchanged in the HOME country (APAPA 0 and APMPM 0). HOME country exports the manufacturing goods. a. Based on the prediction of the specific-factors model, who (The owner of capital or owner of land) is better off? b. Arrange the following terms in ascending order (Please show the steps clearly): APM PM APAPA ARK RK ARTRT AWIW (A diagram like Figure 3.5 in the ppt is useful)

Answer 1

A). According to the specific - factors model ,there are three factors (land , capital, labour) are using for production of two goods(agriculture, manufactured ).labour is mobile factor ,while land is specific and fixed to agriculture and capital to manufactured .given price of goods and factors firm uses that combination of both goods that increase its profit.

When agriculture goods price decrease , the return that firm are earning are become relatively lower in agriculture than manufactured goods . And firm or country shifted its mobile factor (labour) to agriculture to manufactured. Because specific factor ( capital ) is fixed,its price increase and land prices decrease and capital owner gets better off due to increase in capital 's price.

on x axis is production of manufactured good and on y axis is production of agriculture goods . Before prices changes price ratio line( green line) touche ppf and that's the equilibrium. When price of agriculture decrease ,price ratio line changes ( blue line) and touches ppf at new equilibrium point ,where quantity of agriculture is lower than before and quantity of manufactured is more than before and capital owner is better off with decrease in agriculture price.

B). ∆Pa/Pa<0

∆Pm/Pm=0

∆Rt/Rt<0(t is symbol for land,R for return)

∆Rk/Rk>0(K is symbol for capital,R for return)

∆W/W=0(increase wage in manufactured market will set off by decrease wage in agriculture,thus no change)

Ascending order:

(∆Pa/Pa)or∆Rt/Rt ,∆Pm/Pm or ∆W/W,∆Rk/Rk