5. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows: Components: Total costs of production 5 PC ? QC 5 100 Earnings of high-skilled labor 5 WH ? HC 5 25 Earnings of low-skilled labor 5 WL ? LC 5 25 Earnings of capital 5 R ? KC 5 50 Share of total costs paid to high-skilled labor 5 25/100 5 25% Share of total costs paid to low-skilled labor 5 25/100 5 25% R&D: Total costs of R&D 5 PR ? QR 5 100 Earnings of high-skilled labor 5 WH ? HR 5 30 Earnings of low-skilled labor 5 WL ? LR 5 20 Earnings of capital 5 R ? KR 5 50 Share of total costs paid to high-skilled labor 5 30/100 5 30% Share of total costs paid to low-skilled labor 5 20/100 5 20% a.In which factor(s) is components intensive? In which factor(s) is research intensive? b.Suppose that due to the opening of trade, the relative price of R&D in- creases, D PR/PR 5 10%, whereas the price of components stays unchanged, D PC/PC 5 0. Calculate the change in the relative wage of high-skilled and lowskilled labor. c.What has happened to the relative wage of high-skilled/low-skilled labor? How does this result compare with Problem 4, and explain why it is similar or different.
5. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:
Components: Total costs of production 5 PC ? QC 5 100
Earnings of high-skilled labor 5 WH ? HC 5 25
Earnings of low-skilled labor 5 WL ? LC 5 25
Earnings of capital 5 R ? KC 5 50
Share of total costs paid to high-skilled labor 5 25/100 5 25%
Share of total costs paid to low-skilled labor 5 25/100 5 25%
R&D: Total costs of R&D 5 PR ? QR 5 100
Earnings of high-skilled labor 5 WH ? HR 5 30
Earnings of low-skilled labor 5 WL ? LR 5 20
Earnings of capital 5 R ? KR 5 50
Share of total costs paid to high-skilled labor 5 30/100 5 30%
Share of total costs paid to low-skilled labor 5 20/100 5 20%
a.In which factor(s) is components intensive? In which factor(s) is research intensive?
b.Suppose that due to the opening of trade, the relative price of R&D in- creases, D PR/PR 5 10%, whereas the price of components stays unchanged, D PC/PC 5 0. Calculate the change in the relative wage of high-skilled and lowskilled labor.
c.What has happened to the relative wage of high-skilled/low-skilled labor? How does this result compare with Problem 4, and explain why it is similar or different.
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