A country’s labor market between food (QF) and clothing (QC) is currently in equilibrium. Labor is used to produce both goods. Land (T) is only used to produce food and Capital (K) is only used to produce clothing.

a. Draw a graph that shows the equilibrium wage. Put the origin for the clothing axis on the left side of the graph. Be sure to clearly label your axes and indicate the equations that represent each curve.

b. Explain why the equilibrium wage occurs when wages in both industries are equal.

c. Assume that the price of food falls and the price of clothing remains the same. Show the effect on the graph that you drew in part (a). Would this suggest the country is importing or exporting food?

d. Explain what happens to the real wage in terms of clothing. Show and explain what happens to the real wage in terms of food. Are workers are better off?

e. Building off part (c), show and explain what happens to the real returns to capital and land when the price of food falls and the price of clothing remains the same.

Answer rating: 100% (QA)

a Consider the given problem here there are two goods cloth and food Now in the following fig we have the VMPL of cloth and food both are downward slo... View the full answer