question archive The following two equations describe this long-run situation for prices and costs in wheat and cloth production The coefficients indicate the amounts of each input (land and labor) needed to produce a bushel of wheat or a yard of cloth
The following two equations describe this long-run situation for prices and costs in wheat and cloth production The coefficients indicate the amounts of each input (land and labor) needed to produce a bushel of wheat or a yard of cloth
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The following two equations describe this long-run situation for prices and costs in wheat and cloth production The coefficients indicate the amounts of each input (land and labor) needed to produce a bushel of wheat or a yard of cloth. r is the rental price of land and wis the wage. Puheat=2r + lw Pelech = 1r +3w There are two countries, A and B. Country A is large and Country B is small. Suppose that in Country A, Pwheat = $25, Path=$25,r=$10, and w=$5.
a. In Country B, Pwless = $30 and Peloth = $20 under autarky. What are the long-run equilibrium values of r and w?
b. Suppose that once trade opens, the prices of the two goods in Country B are Puheat $27.5 and Peth $22.5. What are the long-run equilibrium values of r and w?
c. In this example, do factor prices tend to converge with trade? Does trade fully equalize factor prices?
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