a) If labor and capital markets are perfectly competitive, what are the conditions (two for each sector) relating the amount of each factor employed in a sector to the price of the factor and the price of the product? Make sure to base your answer on the provided production functions. b) For each sector, combine the two conditions from (a) to obtain the capital/labor ratio Ki/Li in each sector i as a function of the wage/rental ratio w/r. Which good is labor-intensive? c) Use the results from a) and b) to derive the relationship between the relative price of goods Pc/Pp and the relative factor price w/r. [Hint: first get from a) a relation between the relative price of goods and the marginal products of, say, labor in the two sectors; write the marginal products in terms of Ki/Li; then from b) you know how Ki/L; depends on w/r...] Do you find a positive or a negative relationship?
a) If labor and capital markets are perfectly competitive, what are the conditions (two for each sector) relating the amount of each factor employed in a sector to the price of the factor and the price of the product? Make sure to base your answer on the provided production functions. b) For each sector, combine the two conditions from (a) to obtain the capital/labor ratio Ki/Li in each sector i as a function of the wage/rental ratio w/r. Which good is labor-intensive? c) Use the results from a) and b) to derive the relationship between the relative price of goods Pc/Pp and the relative factor price w/r. [Hint: first get from a) a relation between the relative price of goods and the marginal products of, say, labor in the two sectors; write the marginal products in terms of Ki/Li; then from b) you know how Ki/L; depends on w/r...] Do you find a positive or a negative relationship?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Heckscher-Ohlin:
Consider an economy with two goods (cornand potatoes), both produced using capital and labor. Both factors can freely move across sectors. The technologies for the two sectors are given by the following Cobb-Douglas production functions:
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