Consider the model of a firm that produces final goods using R&D and components as inputs, with cost dataas follows:Assembly: Total cost of production = PAQA = 400Earnings of High-Skilled Labor = WHHA = 100Earnings of Low-Skilled Labor = WLLA = 200Earnings of Capital = RKA = 100R&D: Total cost of production = PRQR = 400Earnings of High-Skilled Labor = WHHR = 175Earnings of Low-Skilled Labor = WLLR = 125Earnings of Capital = RKR = 100A) Which factor is assembly intensive? In which factor(s) is R&D intensive?B) Suppose that due to the opening of trade, the price of assembly falls by ∆PA/PA = −20%, the price of R&D remains unchanged, ∆PR/PR = 0%, and capital’s share earnings remains constant.C) What has happened to the relative wage of high-skilled/low-skilled labor? Does this match the predictions of the offshoring model?
Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data
as follows:
Assembly: Total cost of production = PAQA = 400
Earnings of High-Skilled Labor = WHHA = 100
Earnings of Low-Skilled Labor = WLLA = 200
Earnings of Capital = RKA = 100
R&D: Total cost of production = PRQR = 400
Earnings of High-Skilled Labor = WHHR = 175
Earnings of Low-Skilled Labor = WLLR = 125
Earnings of Capital = RKR = 100
A) Which factor is assembly intensive? In which factor(s) is R&D intensive?
B) Suppose that due to the opening of trade, the price of assembly falls by ∆PA/PA = −20%, the price of R&D remains unchanged, ∆PR/PR = 0%, and capital’s share earnings remains constant.
C) What has happened to the relative wage of high-skilled/low-skilled labor? Does this match the predictions of the offshoring model?
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