Question

Suppose that a U.S. worker can produce 1,000 pairs of shoes or 10 industrial robots per year. For simplicity, assume there are no costs other than labor costs and firms earn zero profits. Initially, the U.S. economy is closed. The domestic price of shoes is $30 a pair, so that a U.S. worker can earn $30,000 annually by working in the shoe industry. The domestic price of a robot is $3,000, so that a U.S. worker can also earn $30,000 annually working in the robot industry. Now suppose that the U.S. opens trade with the rest of the world. Foreign workers can produce 500 pairs of shoes or 1 robot per year. The world price of shoes after the U.S. opens its markets is $10 a pair, and the world price of robots is $5,000.
What do foreign workers earn annually, in dollars?

Answer 1

Answer: $5,000

Explanation:

Assuming zero profits and assuming that Labour costs are the only cost, that means that the selling price times the amount produced is also the amount that the workers make.

The Foreign Workers are able to make 500 pairs or shoes per year. Each pair is sold for $10.

That means that from the shoe industry the worker can make,

= 500 * 10

= $5,000

From the Robot industry, the Foreign worker can make 1 robot per year. A robot is sold for $5,000.

That means that the foreign worker makes,

= 5,000 * 1

= $5,000 from the robot industry as well.

From both industries, the foreign worker can make $5,000.