A small country is the victim of a major flood that destroys a significant portion of its land used for agricultural production, but there is no loss of labor or capital. Use the short-run specific factors model to analyze the effect s of the flooding.
A. Make a diagram illustrating how this loss of productive land changes this country's production possibilities. Assume that world prices for agriculture and manufacturing remain constant.
B. Make a diagram that shows the impact of the flood on nominal wages in manufacturing and agriculture, as well as the impact of the flood on the allocation of labor. What happens to real wages? Explain how you know.
C. Explain how the flood will affect rents on capital and land.