Suppose we are considering a HO model setting, where countries have not yet opened up to trade. Two goods are produced exclusively by domestic labor supplies, tires and vehicle frames. Suppose a tire is labor-intensive in production whereas constructing vehicle frames is a capital intensive task that more frequently features automated machinery. Home and foreign maintain the following capital (K) and labor (L) endowments. Factor L K Home 1120 575 Foreign 1680 950 Suppose these countries transition into a free trade scenario. Using the previous details about both countries, perform the following tasks. (i) Sketch a world relative price, CPC line, through your bundle such that it passes through the PPF (it will have no tangency to PPF). (ii) Using this CPC line, with its fixed slope, shift the line until it is perfectly tangent with the indifference curve. Update your sketch with this newly labeled CPC. (iii) Correctly label the equilibria points at which Home consumes and produces. (iv) On your x-axis, and y-axis, indicate the area over which goods are either imports or exports, leveraging use of the differences in your consumption and production bundle. No values are necessary here, only ranges on your axes.
Suppose we are considering a HO model setting, where countries have not yet opened up to trade. Two goods are produced exclusively by domestic labor supplies, tires and vehicle frames. Suppose a tire is labor-intensive in production whereas constructing vehicle frames is a capital intensive task that more frequently features automated machinery. Home and foreign maintain the following capital (K) and labor (L) endowments. Factor L K Home 1120 575 Foreign 1680 950 Suppose these countries transition into a free trade scenario. Using the previous details about both countries, perform the following tasks. (i) Sketch a world relative price, CPC line, through your bundle such that it passes through the PPF (it will have no tangency to PPF). (ii) Using this CPC line, with its fixed slope, shift the line until it is perfectly tangent with the indifference curve. Update your sketch with this newly labeled CPC. (iii) Correctly label the equilibria points at which Home consumes and produces. (iv) On your x-axis, and y-axis, indicate the area over which goods are either imports or exports, leveraging use of the differences in your consumption and production bundle. No values are necessary here, only ranges on your axes.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose we are considering a HO model setting, where countries have not yet opened up to trade. Two goods are
produced exclusively by domestic labor supplies, tires and vehicle frames. Suppose a tire is labor-intensive in production
whereas constructing vehicle frames is a capital intensive task that more frequently features automated machinery.
Home and foreign maintain the following capital (K) and labor (L) endowments. Factor L K Home 1120 575 Foreign
1680 950 Suppose these countries transition into a free trade scenario. Using the previous details about both countries,
perform the following tasks. (i) Sketch a world relative price, CPC line, through your bundle such that it passes through
the PPF (it will have no tangency to PPF). (ii) Using this CPC line, with its fixed slope, shift the line until it is perfectly
tangent with the indifference curve. Update your sketch with this newly labeled CPC. (iii) Correctly label the equilibria
points at which Home consumes and produces. (iv) On your x-axis, and y-axis, indicate the area over which goods are
either imports or exports, leveraging use of the differences in your consumption and production bundle. No values are
necessary here, only ranges on your axes.
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