Question

Imagine an economy makes only clothes (QC) and food (QF) and has two inputs of production:...

Imagine an economy makes only clothes (QC) and food (QF) and has two inputs of production: Labor (L) and Capital (K). It takes 4 units of capital and 1 unit of labor to make one unit of clothing. It takes 1 unit of capital and 1 unit of labor to make one unit of food. There is no substitutability between the two inputs.

Hint: the total cost of production, TC, is equal to the wL+rK. You can think of L and K in this context as the number of units of Labor or Capital that it takes to make one unit of the good.

a. Write down the unit cost of production for one unit of clothing and one unit of food as a function of the wage (w) and rental rate (R). In a competitive market, those costs will be equal to the prices of clothing (PC) and food (PF), so write equations that set the price of the good equal to the cost of producing it.

b. Use the two equations in part (a) to solve for equations for w and R in terms of PC and PF(hint: you have two equations and two unknowns. This will take some algebra).

c. Before trade, the no-trade prices are Pc=$35 and PF=$20. Calculate w and R.

d. When trade opens, Home exports QC and the world prices are Pc=$39 and PF=$15. Calculate w and R again under the world prices. Compare them to what you found in part (c). How is this consistent with the Heckscher- Ohlin Model?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider our usual setting with two goods (food and clothing) and two inputs (capital and labor)....
Consider our usual setting with two goods (food and clothing) and two inputs (capital and labor). Units of labor and capital respectively needed to produce one unit of food are given by LF = 4, KF = 1, meaning that you need 4 units of labor and 1 unit of capital to produce 1 unit of food. The input requirements to produce one unit of clothing are given by LC = 1, KC = 2. Denote LC and KC as...
2. Use the specific-factors model to answer question 2. Assume that there are two industries, food...
2. Use the specific-factors model to answer question 2. Assume that there are two industries, food and cloth. The food industry uses labor and land as inputs while the cloth industry uses labor and capital as inputs. The marginal product of labor in both industries is as follows:                    Marginal Product of Labor Labor            Cloth                   Food 0               1.4                    1.6 1               1.3                    1.5 2               1.2                    1.4 3               1.1                    1.3 4                1                     1.2 5                .9                    1.1 6                .8                     1 7                .7                     .9...
A hat manufacturing firm has the following production function with capital and labor being the inputs:...
A hat manufacturing firm has the following production function with capital and labor being the inputs: Q = min(5L,3K) (it has a fixed-proportions production function). If w is the cost of a unit of labor and r is the cost of a unit of capital, derive the firm’s optimal inputs, long-run total cost curve, average cost curve, and marginal cost curve in terms of the input prices and Q. b) A firm has the linear production function Q = 2L...
Consider the following data on quantities of two factors, capital and labor, available, and their use...
Consider the following data on quantities of two factors, capital and labor, available, and their use to produce a unit of each of the two goods, cloth and food: K = 3000, L = 2000, aKC = 2, aLC= 2, aKF = 3, aLF = 1. a.     Derive equations for PC and PF. Now solve the equations for w (wage rate) and r (capital rental rate). (No need to write the expressions on the answer space provided). Answer the following questions...
Consider a firm for which production depends on two normal inputs, labor and capital, with prices...
Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w=4 and r=2. These prices shift to w=8 and r=6. In which direction will the substitution effect change the firm’s employment and capital stock? In which direction will the scale effect change the firm’s employment and capital stock? Can we say conclusively whether the firm will use more or less labor? More or...
Consider a firm for which production depends on two normal inputs, labor and capital, with prices...
Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w=4 and r=2. These prices shift to w=8 and r=6. In which direction will the substitution effect change the firm’s employment and capital stock? In which direction will the scale effect change the firm’s employment and capital stock? Can we say conclusively whether the firm will use more or less labor? More or...
QUESTION 2 The textbook considers the extension of the Ricardian model to more than two goods...
QUESTION 2 The textbook considers the extension of the Ricardian model to more than two goods – let’s consider the case of more than two countries. Consider a world of FIVE countries: two countries (A, B, C, D and E), that produce clothing and food with one factor of production, labor. Suppose the opportunity cost of clothing with respect to food (aLC/ALF) in each country is the following: A: 1    B: 2   C: 3   D:4   E:5 Suppose the international...
Comparative Advantage There are two countries in the world. There are also only two different types...
Comparative Advantage There are two countries in the world. There are also only two different types of goods produced, food and clothing. Each country has the same amount of “inputs” (i.e. labor, capital, raw materials, etc.), which amounts to 100,000 units of input. Below is a chart that lists out how many units of output each country could create if they created just one type of good. For example, if Country A produced ONLY food, then with 100,000 units of...
Consider a two countries, Portugal and England, that produce two goods, wine and cheese, with only...
Consider a two countries, Portugal and England, that produce two goods, wine and cheese, with only one factor of production, Labor. In Portugal, one unit of labor can produce 1 unit of wine or 1 unit of cheese. In England, one unit of labor can produce 1 unit of wine or 2 of cheese. There are 100 units of labor in Portugal, and 100 in England. Countries share the same tastes, and there is perfect competition. 1) Fill in the...
) Consider Home produces computers(C) and food(F) using capital(C) and labor(L). The unit factor requirements are...
) 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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT