Refer to the following diagram. Assume all migration is costless Market X Market

Question

Refer to the following diagram. Assume all migration is costless Market X Market YY 10 10 VMP 1,000 1,500 Labor 250 500 Labor If wages are initially $10 in country X and $25 in country Y, then we should expect a relative price advantage in country O X, eventually resulting in greater export sales to Y and thus greater derived demand for labor in X. X, eventually resulting in greater imports from Y and thus greater derived demand for labor in X Y, eventually resulting in greater imports from X and thus greater derived demand for labor in Y Y, eventually resulting in greater export sales to X and thus greater derived demand for labor in Y

Explanation / Answer

Ans

A IS right. Lower wage leads to greater demand for labour and thus greater production at lower price. Lower price leads to exports from X

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