3. Assume a specific factors economy produces two goods, cloth and food, and that when representing the output of this economy graphically, cloth is on the x-axis and food is on the y-axis. Suppose labor is the mobile factor, while the cloth industry uses machine as a specific factor and the food industry uses land as a specific factor.

A) Explain what happens to returns to labor (wage) and the allocation of labor between the two sectors when the price of cloth increases by 8% and the price of food increases by 8%.

B) Explain what happens to returns to labor (wage) and the allocation of labor between the two sectors when the price of cloth increases by 8% but the price of food remains unchanged.

4. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why?