There are two goods, Computers and Wheat, and two factors of production, capital and labor. Production in both sectors satisfies constant returns to scale. Production of computers is relatively more capital-intensive. Both input and final goods markets are competitive. Goods are freely traded internationally, but factors are immobile across countries. We will focus our analysis on the Home country. In the initial equilibrium, the Home country produces both computers and wheat, but only exports wheat. In our analysis, we will consider the following sequence of time-frames: . In the short run, both factors are completely specific to their initial sectors of employ- ment. (i.c. both factors are used to produce both goods, but in the short run it is impossible to relocate the factors that are currently in use for production)

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
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Chapter1: Making Economics Decisions
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There are two goods, Computers and Wheat, and two factors of production, capital and labor.
Production in both sectors satisfies constant returns to scale. Production of computers is
relatively more capital-intensive. Both input and final goods markets are competitive. Goods
are freely traded internationally, but factors are immobile across countries. We will focus our
analysis on the Home country. In the initial equilibrium, the Home country produces both
computers and wheat, but only exports wheat. In our analysis, we will consider the following
sequence of time-frames:
In the short run, both factors are completely specific to their initial sectors of employ-
ment. (i.c. both factors are used to produce both goods, but in the short run it is
impossible to relocate the factors that are currently in use for production)
. In the medium run, capital is specific but labor can relocate.
. In the long run, both factors are mobile across sectors.
• In each run, the prices of factors adjust to equilibrate the factor markets.
(a) Suppose there is a change in the rest of the world that causes a fall in the price of
computers relative to wheat. In this exercise you will consider the effects of the change
in the relative price of computers to wheat on the real income of the owners of the factors
of production in the Home Country. Reproduce and complete Table 1. Write whether
the owner of that factor is a winner or loser from the change in the relative price of
computers to wheat. In the case of ambiguity, please provide a brief explanation.
Transcribed Image Text:There are two goods, Computers and Wheat, and two factors of production, capital and labor. Production in both sectors satisfies constant returns to scale. Production of computers is relatively more capital-intensive. Both input and final goods markets are competitive. Goods are freely traded internationally, but factors are immobile across countries. We will focus our analysis on the Home country. In the initial equilibrium, the Home country produces both computers and wheat, but only exports wheat. In our analysis, we will consider the following sequence of time-frames: In the short run, both factors are completely specific to their initial sectors of employ- ment. (i.c. both factors are used to produce both goods, but in the short run it is impossible to relocate the factors that are currently in use for production) . In the medium run, capital is specific but labor can relocate. . In the long run, both factors are mobile across sectors. • In each run, the prices of factors adjust to equilibrate the factor markets. (a) Suppose there is a change in the rest of the world that causes a fall in the price of computers relative to wheat. In this exercise you will consider the effects of the change in the relative price of computers to wheat on the real income of the owners of the factors of production in the Home Country. Reproduce and complete Table 1. Write whether the owner of that factor is a winner or loser from the change in the relative price of computers to wheat. In the case of ambiguity, please provide a brief explanation.
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