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 by1F.(Ke, Le) = K. Lễ and Fa(Ka, Sa) = K}S}.That is, skilled labour is specific to pharmaceutical drugs, and unskilled labour tocars. Suppose that the countries' factor endowments are KH = 2 = KF,and LF = 3/2, and SHLH:1||1 and SF = 1/2, so that the total labour force is 2 inboth countries. The price of capital is denoted by r, the price of skilled and unskilledand normalise pa =labour by w, and wi. Denote the goods' prices by pcandРа,: 1for simplicity.The demand for cars and drugs in country j = H, F is given by x and r:%3D2Yiand ra3 pe1Yi%3D3 pawhere Y' denotes aggregate income in country j.(a) Draw or compute the PPFS of Home and Foreign.

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Answered: (a) Draw or compute the PPFS of Home…

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(a) Draw or compute the PPFS of Home and Foreign.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider the Specific Factors model
with two countries, Home and Foreign, with two goods, cars (c) and pharmaceutical
drugs (d), and three factors, capital K, skilled labour S, and unskilled labour L. The
production functions are given by
1
F.(Ke, Le) = K. Lễ and Fa(Ka, Sa) = K}S}.
That is, skilled labour is specific to pharmaceutical drugs, and unskilled labour to
cars. Suppose that the countries' factor endowments are KH = 2 = KF,
and LF = 3/2, and SH
LH
:1
||
1 and SF = 1/2, so that the total labour force is 2 in
both countries. The price of capital is denoted by r, the price of skilled and unskilled
and normalise pa =
labour by w, and wi. Denote the goods' prices by pc
and
Ра,
: 1
for simplicity.
The demand for cars and drugs in country j = H, F is given by x and r:
%3D
2Yi
and ra
3 pe
1Yi
%3D
3 pa
where Y' denotes aggregate income in country j.
(a) Draw or compute the PPFS of Home and Foreign.

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