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 byF.(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, L#and LF = 3/2, and SH = 1 and SF= 11/2, 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 pc and pd, and normalise pd1for simplicity.The demand for cars and drugs in country j = H, F is given by x and r:1Yi2Yiand x3 ре||3 piwhere Y' denotes aggregate income in country j.(c) Compute the autarky equilibrium in Foreign and show that p > p. Compareequilibrium prices in Home and in Foreign and explain.

Autarky equilibrium refers to a state of affairs in worldwide alternate where a country or an…

Answered: shap 100:411000049

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Economics

shap 100:411000049

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
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, L#
and LF = 3/2, and SH = 1 and SF
= 1
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
labour by w, and w. Denote the goods' prices by pc and pd, and normalise pd
1
for simplicity.
The demand for cars and drugs in country j = H, F is given by x and r:
1Yi
2Yi
and x
3 ре
||
3 pi
where Y' denotes aggregate income in country j.
(c) Compute the autarky equilibrium in Foreign and show that p > p. Compare
equilibrium prices in Home and in Foreign and explain.

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