Hypothetical Case: The following equations describe the long-run situation for p

Question

Hypothetical Case: The following equations describe the long-run situation for prices and costs, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. W is the wage rate/hour and R is the rental rate/hour.

Price of wheat = 1 W + 3 R;

Price of cloth = 2 W + 1 R

In autarky, the price of wheat is 15 and the price of cloth is 10. As trade opens up, cloth price rises from 10 to 15. Wheat price remains at 15.

Consider Hypothetical Case above. In autarky, how many units of wheat can a worker buy with 1 hour of labor?

Select one:

a. 4/5

b. 5/4

c. 1/5

d. None of the above.

Explanation / Answer

At Chegg we try to help student and solve your queries however we are authorized to answer 1 question and its 4 sub-parts at a time. Hence solving question and its sub-parts. Do give thumbs up for the answer and the efforts put in.

Answer to question-

In the given question a hypothetical situation is considered for price and cost where in autarky wheat and cloth is being produced with the use of labor and land.

Here as per the question

Price of wheat is 1W+3R

Price of cloth is 2W+1R

Let us assume that W (wage rate/hour) to be 20 and R(rental rate/hour) to be 10.

Now as per the equation given price of the wheat would be

1W+3R

1(20)+ 3(10) = 20+30 = 50

so, price of wheat is 50.

And now lets see what is the price of cloth as per the given equation

2W+1R

2(20) + 1(10) = 40+10 =50

so, the price of wheat is 50

Thus we can see that cost of cloth is more than wheat.

The correct option answer for the given question is (d). none of the above.

The options given in the question are 4/5, 5/4, 1/5 all are incorrect because if the price of the wheat is 15 and as we assumed the wage rate per hour to be 20 and rental rate per hour to be 10 then if we have to buy wheat with 1 hour of labor then it would be 1/3 and not 4/5 or 5/4 or 1/5. As the worker is working for producing both wheat and cloth and as we can see the price of cloth is increasing whereas the price of wheat is constant so its fair for the worker to give more of this time in producing cloth because it will yield better result. The worker would like to give more time to cloth making than wheat so this will result is letting him buy less wheat with his one-hour of labor.

None of the given option are correct as when price remains constant for wheat then by giving one hour of labor in which a worker is working for both wheat and cloth would not be able to buy 4/5, 5/4, 1/5 units of wheat.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.