Home produces two goods: hops and iron. Production of each good requires the use of labor, which is mobile between the two industries. Hop production also requires the use of land, while iron production requires the use of capital. Suppose the autarky price of hops is $4/pound and the price of iron is $10/pound. All assumptions of the specific factors model apply. a. Graph the PPF for Home with iron on the x-axis. Label an autarky equilibrium. What is the slope of the PPF at this point? Explain. b. Suppose Home opens to trade with Foreign, where the autarky relative price of iron is 2. Show the effect of trade on production and consumption in the Home country in the diagram from part a. Label a possible slope of the world price line. c. How does the marginal product of labor change with trade in each sector in the Home country? Explain. What does this imply for real wages in the country? Explain. d. Would landowners in the Home country support trade with Foreign? Would capital owners? Explain using real rental rates.
Home produces two goods: hops and iron. Production of each good requires the use of labor, which is mobile between the two industries. Hop production also requires the use of land, while iron production requires the use of capital. Suppose the autarky price of hops is $4/pound and the price of iron is $10/pound. All assumptions of the specific factors model apply. a. Graph the PPF for Home with iron on the x-axis. Label an autarky equilibrium. What is the slope of the PPF at this point? Explain. b. Suppose Home opens to trade with Foreign, where the autarky relative price of iron is 2. Show the effect of trade on production and consumption in the Home country in the diagram from part a. Label a possible slope of the world price line. c. How does the marginal product of labor change with trade in each sector in the Home country? Explain. What does this imply for real wages in the country? Explain. d. Would landowners in the Home country support trade with Foreign? Would capital owners? Explain using real rental rates.
Chapter3: The Market And Price System
Section: Chapter Questions
Problem 14E
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Transcribed Image Text:Home produces two goods: hops and iron. Production of each good requires the use of
labor, which is mobile between the two industries. Hop production also requires the use of
land, while iron production requires the use of capital. Suppose the autarky price of hops is
$4/pound and the price of iron is $10/pound. All assumptions of the specific factors model
apply.
a. Graph the PPF for Home with iron on the x-axis. Label an autarky equilibrium. What is the
slope of the PPF at this point? Explain.
b. Suppose Home opens to trade with Foreign, where the autarky relative price of iron is 2.
Show the effect of trade on production and consumption in the Home country in the
diagram from part a. Label a possible slope of the world price line.
c. How does the marginal product of labor change with trade in each sector in the Home
country? Explain. What does this imply for real wages in the country? Explain.
d. Would landowners in the Home country support trade with Foreign? Would capital owners?
Explain using real rental rates.
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