Pick one statement that can be best used to describe the diagram below. Select one – the most appropriate answer, considering provisions of Heckscher-Ohlin model.

Question

BlackTom AI · Accepted Answer

To approach this question, I will evaluate each statement in light of the Heckscher-Ohlin framework and the diagram showing w/r (wage-to-rent ratio) against the labor-capital ratio L/K for two goods FF and CC.
Option 1: 'When wage increases production of FF becomes labor-intensive.' This is inconsistent with the usual intuition of the OH model: increasing the wage (relative to the rent) makes skilled or labor-intensive production relatively more expensive, not more labor-intensive by necessity. Typically, higher wage changes alter comparative advantage in favor of capital-intensive methods, so this claim is not supported by the model.
Option 2: 'As wage falls FF production tends to use relatively more labor.' Here, a fall in w/r means labor becomes cheaper relative to capital. According to OH, the production technique that uses more labor becomes more attractive, so FF would shift toward greater labor intensity. This aligns with the standard interpretation that a lower wage encourages labor-intensive production, making this option plausible.
Option 3: 'As wage falls CC production tends to use relatively less labor.' If w falls, the incentive to shift toward labor-intense methods generally increases for the producing sector, not decreases for CC specifically. Saying CC uses relatively less labor when wages fall contradicts the tendency for labor-intensive goods (like FF, assumed in the diagram) to expand their labor use. This statement is misaligned with the typical response to a wage decline.
Option 4: 'As wage increases production of CC becomes capital-intensive.' While higher wages can push production toward capital-intensive methods, this statement speaks about CC in isolation and does not directly tie to the relation shown in the diagram between FF and CC under wage changes. It also ignores the comparative advantage and relative factor intensities evident in the OH framework where FF is the labor-intensive good and CC the capital-intensive one. The statement is overly general and not the most direct description of the diagram’s implication.
In summary, the second option correctly captures the OH model intuition: a fall in the wage relative to rents makes labor-intensive production (FF) use more labor, aligning with the diagram's indication of relative factor intensities. The other options either misstate the effect of wage changes on factor usage, misattribute the directional shift, or rely on a too-general claim not tied to the diagram's comparative-statics context.

Pick one statement that can be best used to describe the diagram below. Select one – the most appropriate answer, considering provisions of Heckscher-Ohlin model.

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