7. In the short run, when FDI increases in a country, the rental rate on capital

Question

7. In the short run, when FDI increases in a country, the rental rate on capital will _____ and the wage rate will A) decrease; decrease B) increase; decrease C) increase; increase - D) decrease; increase 8. SCENARIO: TRADE IN GOODS BETWEEN CHINA AND THE UNITED STATES (1) China has 1,000 units of capital and 3,000 workers; (2) the United States has 3,000 units of capital and 1,000 workers; (3) clothing production is labor intensive; and (4) chemical production is capital intensive. Reference: Ref 5-1 Suppose that the United States eliminates all restrictions on immigration and Chinese workers are free to emigrate from China to the United States. How many Chinese workers must emigrate from China to the United States in order for factor price equalization to occur? - A) 1,000 B) 2,000 C) 3,000 D) 4,000 9. In a duopoly where products are differentiated and firms charge different prices, the demand curves are _______________ than if the firms sell identical products at the same price. A) steeper B) farther to the right C) more elastic (flatter) - D) less elastic

Explanation / Answer

7. D.

FDI increases the supply of capital in the rental market. Therefore the rental rate decreases. Since there is more capital in the country, the marginal product of labor increases since labor and capital are complementary. Hence the wage rate will increase.

8. B

With 2000 workers moved to US, China has 1000 workers and 1000 units of capital whereas US has 3000 workers and 3000 units of capital. Since the worker/capital units are the same the factor prices must be the same.

9. D

Since there is differentiation, an increase in price will not generate many people to substitute with the other product. Therefore the demand is less elastic.

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