Question
Consider a Specific Factors Model. Suppose that the home country produces only two goods, food and cloth. Labor is the mobile factor of production, that
Consider a Specific Factors Model. Suppose that the home country produces only two goods, food and cloth. Labor is the mobile factor of production, that can move freely between the two sectors at Home. Land is a factor of production that is specific to food production, and capital is a factor of production that is specific to cloth production.Suppose that from the initial situation described at Home in (b), the price of cloth falls by 10%, ceteris paribus. In a graph showing the VMPL curves for both cloth and food for Home, explain clearly how this change would affect nominal wages, labor employment in the cloth sector and labor employment in the food sector.
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