Canada produces airplanes, which require labour and capital to produce, and beef, which requires labour and land to produce. Canada exports planes. If the world price of plane increases thenGroup of answer choicesCanada will completely specialize in plane productionCapital to labour ratio in plane industry will decreaseCapital to labour ratio in plane industry will increaseCapital to labour ratio in plane industry will not change
Question
Canada produces airplanes, which require labour and capital to produce, and beef, which requires labour and land to produce. Canada exports planes. If the world price of plane increases thenGroup of answer choicesCanada will completely specialize in plane productionCapital to labour ratio in plane industry will decreaseCapital to labour ratio in plane industry will increaseCapital to labour ratio in plane industry will not change
Solution
The correct answer is: Capital to labour ratio in plane industry will increase.
Step 1: Understanding the Situation Canada produces airplanes and beef. Airplanes require labour and capital to produce, while beef requires labour and land. The world price of planes increases.
Step 2: Understanding the Impact When the world price of planes increases, it becomes more profitable for Canada to produce and export planes. This could lead to an increase in the demand for the factors of production needed to produce planes, namely labour and capital.
Step 3: Identifying the Correct Answer Given that both labour and capital are required to produce planes, an increase in plane production could lead to an increase in the demand for both. However, if the capital is more specific to the production of planes (as opposed to labour, which is more mobile and can be used in other industries), the demand for capital could increase more than the demand for labour. This would lead to an increase in the capital to labour ratio in the plane industry.
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