Question

Which of the following provides the most reasonable intuition for the Stolper-Samuelson Theorem?

A. A decrease in the price of lumber leads to a welfare increase for forest owners.

B. As Canada and Brazil open up to free trade, the relative returns of oil fields to forests converge across both countries.

C. A decrease in the price of oil leads to welfare losses for the owners of oil fields.

D. An increase in the amount of forests available for harvest leads to a decrease in the price of lumber.

Answer 1

Answer. (c) A decrease in the price of oil leads to welfare losses for the owners of oil fields.

Explanation: The stolper samuelson theorem states that if the price of a good increases relative to some other good, then the factors which are used intensively for the production of that first good, their real return will increase and the real return of less intensive factor will decrease.

In this question, oil is the first good. Let the other good be a bundle of other goods for example. Now when the price of oil decreases with respect to other goods, the intensive factors of oil production should suffer a decrease in real return. The most intensive factor used in the production of oil is its oil fields. When the real returns to oil fields will fall, its owners will earn less profits or more losses, and thus their welfare will also fall.