Question

Assume that a given country produces Tuaca and avocados. Using the specific factors model, discuss the income distribution effects that follow from an increase in the price of Avocados. Use a graphical framework in your answer.

Answer 1

Specific factor model is basically a short run model with specific (fixed) factors such as land and capital. But it is to be noted that the labor is a mobile (variable) factor here.

Let's assume that the country mentioned here produces just two goods; avocados and Tuaca. The land and capital inputs are fixed in this model so changes in the economy is supposed to affect the variable input, ie; the labor or the working hours.

Its important to understand that the Labor is shared between the two sectors. ( L = L_A+L_T )

........................ go through the images.