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Consider an economy in a two factor, two good type world of the Heckscher-Ohlin (H-O model). The economy produces two goods, bananas and chocolate. Each good uses two factors of production, land and labor. Banana is considered the relatively land intensive good. a. What is the effect of an increase in the supply of labor -- keeping all else constant-- on the quantities of bananas and chocolate produced?

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emmanuelkossy

Answer: Explanation:

When there is an increase in supply of labor, the price of the labor-intensive good (chocolate) would be bid down relative to the price of banana that is land intensive.  This would lead to more production of banana and eventually lead to export as the price will be temporarily higher in the other country where it is being exported to.

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