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Consider Japan that produces manufacturing and agricultural products. Assume that land is a factor used specifically...

Consider Japan that produces manufacturing and agricultural products. Assume that land is a factor used specifically in the agricultural sector, and capital is used in manufacturing sector only. If the price of agricultural products on the world market decreases, rent in which sector will increase the most?

A. Nominal rent will increase in agricultural sector but real rent will not change

B. Manufacturing

C. Both sectors will lose

D. Agricultural

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Answer #1

Answer:- B
Reason:- Rent is the rate at which factors of production are lent for carrying on business activities. Now due to the fall in prices of agricultural products, the supply of the same products will fall as per the law of supply. Decrease in supply means the decrease in the production. So the demand for factors of production in agricultural sector will fall and hence the rent in this sector would not rise. Now the producers will shift on to the production of manufacturing products. It means the production in this sector rises. Hence the rent will also rise.

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