Switzerland produces both watches and chocolate. Watches are relatively capital

Question

Switzerland produces both watches and chocolate. Watches are relatively capital intensive in their production, while chocolate is relatively labor intensive. If Switzerland experiences an increase in its labor endowment, according to the Rybczynski theorem:

Select one:

a. we would expect the production of both watches and chocolate to rise.

b. we would expect the production of watches to decline and that of chocolate to rise.

c. we would expect the production of both watches and chocolate to decline.

d. we would expect the production of watches to rise and that of chocolate to decline.

Explanation / Answer

b. we would expect the production of watches to decline and that of chocolate to rise.

The Rybczynski Theorem says that if endowment of some resource increases, the industry that uses that resource most intensively will increase its output while the other indus­try will decrease its output. This means production of that industry which used labor intensively increases i.e. Chocolate while production of other industry i.e Watches decreases.

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