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Answers to Textbook Problems
1. Texas and Louisiana are both oil-producing states. A decrease in the price of oil will reduce output in
these two states, hurting owners of capital and workers in the oil industry. While some capital will be
2. a.
b.
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 4 Specific Factors and Income Distribution 13
3. a. Draw the
b. From part (a), we know that 30 units of labor are employed in Sector 1 and 70 units of labor are
employed in Sector 2. Looking at the table in Question 2, we see that these labor allocations will
produce 48.6 units of good 1 and 86.7 units of good 2.
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 4 Specific Factors and Income Distribution 14
The decrease in the price of good 2 leads to an increase in the share of labor accruing to Sector 1.
Now, the two sectors have equal wages (P MPL) when there are 50 workers employed in both
sectors.
d. The decrease in the relative price of good 2 led to an increase in production of good 1 and a
4. a. The increase in the capital stock in Home will increase the possible production of good 1, but have
b. Given the increased production possibility
c. If both countries open to trade, Home will export good 1 and Foreign will export good 2.
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 4 Specific Factors and Income Distribution 15
d. Owners of capital in Home and owners of land in Foreign will benefit from trade, while owners of
land in Home and owners of capital in Foreign will be hurt. The effects on labor will be ambiguous
5. The real wage in Home is 10, while real wage in Foreign is 18. If there is free movement of labor, then
workers will migrate from Home to Foreign until the real wage is equal in each country. If 4 workers
move from Home to Foreign, then there will be 7 workers employed in each country, earning a real
wage of 14 in each country.
6. If only 2 workers can move from Home to Foreign, there will be a real wage of 12 in Home and
a real wage of 16 in Foreign.
a. Workers in Foreign are hurt as their wage falls from 18 to 16.
7. By restricting immigration, the drop in wages in the high-wage country is not as high as it would
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
