Using a diagram similar to Figure 4-13, show the effect of a decrease in the relative price of computers, like what happens to Foreign in the chapter. What happens to the wage relative to the rental? Is there an increase in the labor-capital ratio in each industry? Explain.

1. An increase in the relative price of computers shifts the relative demand curve from RD, to RD2- Z/K Wage/ rental Feenstra/Taylor, International Trade, 5e @ 2021 Worth Publishe 2. The relative wage (W/R ) decreases from (W/R), B to (W/R) 2- (W/R) 2 Ls/Ks RD L/K: RD 2 (Lc/Kc)1 ( Lc/Kc)2 (Ls/Ks)1 (Ls/Ks)2 Labor/capital 3. At the new relative wage, the labor-capital ratio in each industry increases. FIGURE 4-13 Effect of a Higher Relative Price of Computers on Wage/Rental An increase in the relative price of computers shifts the economy-wide relative demand for labor, RD1, toward the relative demand for labor in the computer industry, Lc/KC. The new relative demand curve, RD2, intersects the relative supply curve for labor at a lower relative wage, (W/R)2. As a result, the wage relative to the rental falls from (W/R)1 to (W/R)2. The lower relative wage causes both industries to increase their labor-capital ratios, as illustrated by the increase in both Lc/Kc and Ls/Ks at the new relative wage