Question: In the short-run specific-factors model, consider a decrease in the stock of land. For example, suppose a natural disaster decreases the quantity of arable land used for planting crops.
a. Redraw panel (a) of Figure starting from the initial equilibrium at point A.
b. What is the effect of this change in land on the quantity of labor in each industry and on the equilibrium wage?
c. What is the effect on the rental on land and the rental on capital?
d. Now suppose that the international community wants to help the country struck by the natural disaster and decides to do so by increasing its level of FDI. So the rest of the world increases its investment in physical capital in the stricken country. Illustrate the effect of this policy on the equilibrium wage and rentals.
