Question

1. consider the following specific factors model. France and Belgium produce cars using capital and labor, and produce cheese using land and labor. Capital and land are the specific factors and labor is the mobile factor. In the closed-economy equilibrium, the relative price of cheese is lower in France than in Belgium. (26 points, 2 points each).

For each statement, determine whether it is T or F, and then briefly explain why.

(1)-(2) are about the closed-economy equilibria in France and Belgium.

(1). The opportunity cost of cheese increases as cheese output increases in Belgium.

(2). The opportunity cost of cheese is higher in France than in Belgium.

(3)-(5) are about the free-trade equilibria in France and Belgium.

(3). In France, the workers’ real wage for cheese equals MPL for cheese.

(4). France produces only cheese and no cars.

(5). The CPF of France has the same slope as the CPF of Belgium.

The remaining questions are about the movement from no trade to free trade.

(6). The MPL for cars has increased in Belgium.

(7). The workers in France are better off unambiguously.

(8). Capital owners in Belgium are unambiguously better off.

(9). In France, the real returns to capital, in terms of cheese, have increased, because labor employment in the cars industry has increased.

(10). In Belgium, the real returns to land, in terms of cars, have decreased, because labor employment in the cheese industry has decreased.

(11). The French workers have higher purchasing power for cars.

(12). In Belgium, the marginal product of capital, MPK, has increased, but in France, MPK has decreased.

(13). The land owners in France fully support free trade and so are the capital owners in Belgium.

Answer 1

1> False

Reason

It is not mentioned in the question how the PPC curve looks like, so we have no way to tell whether the opportunity cost will rise or fall with the increase in production in Belgium

2> False

Reason

Since France has a comparative advantage, France will have less opportunity cost.

3> True

Reason

In a market equilibrium, that statement is true by definition.

4> False

Reason

This statement is not necessarily true because France may have requirement of car which can not be met by import from Belgium.