13.10 The Rybczynski theorem The country of Podunk produces only wheat and cloth, using as inputs land and labor. Both are produced by constant returns-to-scale production functions. Wheat is the relatively land-intensive commodity.

a. Explain, in words or with diagrams, how the price of wheat relative to cloth (p) determines the land-labor ratio in each of the two industries.

b. Suppose that p is given by external forces (this would be the case if Podunk were a "small" country trading freely with a "large" world). Show, using the Edgeworth box, that if the supply of labor increases in Podunk then the output of cloth will rise and the output of wheat will fall. Note: This result was discovered by the Polish economist Tadeusz Rybczynski. It is a funda- mental result in the theory of international trade.