The following equations describe the long-run situation for prices and costs, where the numbers indicate the amounts of labor and capital needed to produce a unit of wheat and cloth. W is the wage...


The following equations describe the long-run situation for prices and costs, where the numbers indicate the amounts of labor and capital 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 + 2 R


Price of cloth = 2 W + 1 R


In autarky, the price of wheat is 5 and the price of cloth is 4. As trade opens up, wheat price rises from 5 to 6. Cloth price remains at 4.


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


A. 5/4


B. 1/4


C. 1/5


D. 2/5


E. None of the above.



Jun 08, 2022
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