Question

Suppose Country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country. The numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. ‘W’ is the wage rate and ‘r’ is the rental rate of land.

Price of wheat = 1w + 2r

Price of cloth = 2w + 1r

If the initial prices of wheat and cloth are $3 per unit, the labor cost per unit of wheat output is_______and the rental cost per unit of wheat output is_________

a. $2,$3

b. $3, $2

c. $1, $2

d. $2, $1

(explanation please)

Answer 1

Price of wheat= 1w+2r=$3 ($3 is given as the price of wheat)

Price of cloth= 2w+1r= $3( $3 is given as the price of cloth)

Adding them up, we get

3w+3r=6

w+r=2

So price of labour and capital would be $1 each since none of them could have value as 0.

Now the equation of price of wheat is given as 1w+2r=$3, so the labor cost of wheat is 1w, which is 1(1)=$1 and the rental cost of wheat is 2r=2(1)=$2.

Hence answer would be option C)$1,$2

(You can comment for doubts)