Problem PS8.1.1 Two countries, A and B, are trading apples and bananas. Neither country has any capital; labor is the only factor of production. Suppose that country A has a comparative advantage in apples and country B has a comparative advantage in bananas. Then, country A passes a bill to increase all domestic wages proportionately. As a result, the cost of producing apples in country A exceeds the cost of producing them in country B. What happens after the wage bill passes? Country B will export apples to country A. Country B will continue to import apples from country A. The countries will stop trading with each other. None of the above answers are necessarily true.
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- Country A has a comparative advantage in apples. - Country B has a comparative advantage in bananas. - Both countries are trading apples and bananas. Show more…
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