Question

Initially, workers in the shoe industry and the computer industry earn the same wage. Reductions in trade barriers give domestic consumers access to cheaper shoes produced abroad, which causes domestic shoe prices fall. At the same time, foreign consumers purchase more computers, raising the relative price of computers. As a result of these changes, the demand for labor in the shoe industry ______ and the demand for labor in the computer industry ______.A. increases; increasesB. increases; decreasesC. decreases; increasesD. decreases; decreases

Answer 1

Answer:

The correct answer is option C.

Explanation:

It is assumed that initially the workers in both shoe as well as computer industry are earning the same wage rate. Now, with the reduction in trade barriers there is an increase in the import demand for shoes.

This further causes domestic prices of shoes to fall. We know that supply and price are directly related, so the domestic supply of shoes will decline as well. As firms produce less shoes, they will need less workers. This causes demand for labor to decline.

At the same time demand for computers by foreign consumers increases contributing to an increase in its price. This will cause an increase in the supply of computers. The firms will need more workers to produce more. As a result demand for labor in computer industry will increase.