Question

) Consider Home produces computers(C) and food(F) using capital(C) and labor(L). The unit factor requirements are fixed and given by: aLC = 2, aKC = 6, aLF = 3, aKF = 4. The total labor supply is 900 and the total capital stock is 1,500. (1 point) a. Which good is relatively labor intensive? Which good is relatively capital intensive? (2 points) b. Derive and draw the PPF of this country. At which point on the PPF are both factors fully employed? (2 points) c. Suppose Home produces at the point you find in b. According to Rybczynski theorem, what happens to the output mix if the total labor supply increases. (1 point) d. Suppose autarky prices are given by PC = 10, PF = 10. At which point on the PPF does Home produce? (2) Now suppose there is another country, Foreign, with a labor supply of 1,200 and a capital stock of 1,800. Foreign shares the same technology with Home (i.e., a ∗ LC = 2, a ∗ KC = 6, 2 a ∗ LF = 3, a ∗ KF = 4). Home and Foreign engage in free trade. Suppose the world relative price of computers is given by PC/PF = 1.2. (1 point) a. Which country is relatively capital abundant and which labor abundant? (1 point) b. Describe the pattern of trade between Home and Foreign. (2 points) c. Show graphically the production and consumption of Home under free trade. (2 points) d. Who will gain and who will lose from free trade? (1 point) e. In which country are wages higher?

Answer 1