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1.Consider China that produces manufacturing and agricultural products. Assume that land is a factor used specifically...

1.Consider China that produces manufacturing and agricultural products. Assume that land is a factor used specifically in the agricultural sector, and capital is used in manufacturing sector only. If the price of agricultural products on the world market decreases, rent in which sector will increase the most?

A.agriculture

B.manufacturing

C.both will lose

D.nominal rent increase in agriculture but real rent not change

2.If in the specific factor model the prices of both manufactured and agricultural products decrease, then

A.China fully specializes in production of manufactured good

B.Employment decreases in manufacturing sector

C.Employment in both sectors does not change

D.Employment decreases in agricultural sector

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Answer #1

Answer 1:

Option B. If the price of agricultural product declines, then demand for land will decrease and producers will switch to production of manufacturing goods. As the demand for manufacturing goods increases, demand for capital will increase. Thus, rental rate of capital will increase and thus rent will increase in manufacturing sector.

Answer 2:

Option D. Since agriculture is a labor intensive sector, fall in prices of agricultural goods will lead to fall in employment in agricultural sector.

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