Home and Foreign invent di erent technologies to produce tools, beyond their production of cheese and wine. The table of unit labor requirements is:…
1. Home and Foreign invent dierent technologies to produce tools, beyond their production of cheese and wine. The table of unit labor requirements is:ForeignaLT = 6aLW = 3aLC = 3Comparative advantage. In which good does Home have the strongest comparative advantage? In which good does Home have the least comparative advantage? Trade and wages. If the relative wage rate w/w = 1, in what goods will Home specialize? [Hint : You may neglect the relative size of the labor forces for your answer.]Gains from trade. Do both countries benet from trade? Present aneducated verbal argument. Transport costs (transfer question). If transport costs add 50% to the price of a good that is shipped from one country to another, what is the pattern of production and what is the pattern of trade? Will all goods be traded? [Hint : Calculate the total cost of each foreign good to a home consumer and compare it the the cost of the same good when produced at home; then calculate the total cost of a home good to a foreign consumer and compare it the the cost of the same good when produced abroad.]2. Home can produce machinery and flowers (in bundles of 1,000). The production functions of the two industries areQm = squareroot(K*Lm)Qf = squareroot(T*Lf)where K is capital, T is land, and L is labor. Consider goods prices PM = PF =1. Factor supply is Lm + Lf = 100 and T = K = 100.Derive the marginal products of labor MPLm(K/Lm) and MPLf (T/Lf)for the two industries.Autarky wages. Graph the labor demand curves in the machinery andflowers industries, and calculate the equilibrium wage rate in autarky.Trade pattern. After opening up to free trade, Home faces a relative price of Pm/Pf = 2. How do the allocation of labor and wages change?Production possibility frontier. Using the general labor demand relation-ships for the two industries, show that the production possibility frontier is-MPLf/MPLm = -Pm/Pf in labor market equilibrium.Gains from trade. Draw the production possibility frontier. How does the change in relative prices after trade aect production? Depict the gains from trade.3. At current goods and thus factor prices, cloth is produced using 20 hours of labor for each acre of land, while food is produced using only 5 hours of labor per acre of land.Resource allocation. The economy’s total resources are 600 hours of labor and 60 acres of land. Use an Edgeworth box to determine the allocation of resources.Endowment changes. Labor supply increases from 600 to 900 to 1200hours. Using the Edgeworth box, trace out the changing allocation ofresources.Extreme endowment changes. What would happen if the labor supplyincreased beyond 1200 hours?
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