Consider the Specific Factors modelwith two countries, Home and Foreign, with two goods, cars (c) and pharmaceuticaldrugs (d), and three factors, capital K, skilled labour S, and unskilled labour L. Theproduction functions are given by111F(Ke, Le) = K? Lễ and Fa(Ka, Sa) = K¿SThat is, skilled labour is specific to pharmaceutical drugs, and unskilled labour tocars. Suppose that the countries' factor endowments are KH = 2 = KF, L" = 1and LF3/2, and SH1 and SF1/2, so that the total labour force is 2 inboth countries. The price of capital is denoted by r,the price of skilled and unskilledlabour by w, and w. Denote the goods' prices by pe and pa, and normalise pa1for simplicity.The demand for cars and drugs in country j = H, F is given by x and x:1Y2 Yiand r3 pe3 pawhere Yi denotes aggregate income in country j. (a) Draw or compute the PPFS of Home and Foreign.(b) Derive the autarky equilibrium in Home, showing that KH = 4/3 and p = v2.(c) Compute the autarky equilibrium in Foreign and show that p > p. Compareequilibrium prices in Home and in Foreign and explain.(d) With free trade in both goods c and d, which good will Home export, and willskilled or unskilled workers be better off? Explain or compute.(e) Suppose that there is now both free international trade in goods and also inthe factor capital, i.e. capital is mobile between the two countries and the twoindustries, and that the world market price p > 1. Compare the resulting worldmarket equilibrium allocation to autarky and to free trade in goods (verbalexplanation or computation).(f) Suppose that now that Foreign has a production technology1F" (Ke, S.) = 2K Lễ and Ff (La, Sa) = 2K S.Describe the effect of free trade in goods but not factors (compared to autarky) interms of the resulting world market equilibrium good price and wages (explain,no computation needed).

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(a) Draw or compute the PPFs of Home and Foreign. (b) Derive the autarky equilibrium in Home, showing that KH = 4/3 and pH = =√√2. (c) Compute the autarky equilibrium in Foreign and show that pH > pr. Compare equilibrium prices in Home and in Foreign and explain. (d) With free trade in both goods c and d, which good will Home export, and will skilled or unskilled workers be better off? Explain or compute. (e) Suppose that there is now both free international trade in goods and also in the factor capital, i.e. capital is mobile between the two countries and the two industries, and that the world market price pt ≥ 1. Compare the resulting world market equilibrium allocation to autarky and to free trade in goods (verbal explanation or computation). (f) Suppose that now that Foreign has a production technology 1 Fº (Kc, Sc) = 2K½³ L½³ and F (La, S₁) = 2KS. Describe the effect of free trade in goods but not factors (compared to autarky) in terms of the resulting world market equilibrium good price and wages (explain, no computation needed).

(a) Draw or compute the PPFs of Home and Foreign. (b) Derive the autarky equilibrium in Home, showing that KH = 4/3 and pH = =√√2. (c) Compute the autarky equilibrium in Foreign and show that pH > pr. Compare equilibrium prices in Home and in Foreign and explain. (d) With free trade in both goods c and d, which good will Home export, and will skilled or unskilled workers be better off? Explain or compute. (e) Suppose that there is now both free international trade in goods and also in the factor capital, i.e. capital is mobile between the two countries and the two industries, and that the world market price pt ≥ 1. Compare the resulting world market equilibrium allocation to autarky and to free trade in goods (verbal explanation or computation). (f) Suppose that now that Foreign has a production technology 1 Fº (Kc, Sc) = 2K½³ L½³ and F (La, S₁) = 2KS. Describe the effect of free trade in goods but not factors (compared to autarky) in terms of the resulting world market equilibrium good price and wages (explain, no computation needed).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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