This is a four-part question relating to factor markets and unemployment in LDCs:

a. If wages are perfectly flexible, then there will be no involuntary unemployment. Is this statement true or false? Explain your answer. (5 points)

b. Give three reasons why wages may not be perfectly flexible. (5 points)

c. In addition to wages, the price of capital may be distorted and not reflect its scarcity value. List and explain two policies that can distort the price of capital. (10 points)

d. Why should factor prices reflect the scarcity value of labor and capital? (5 points)