factor proportions

FACTOR PROPORTIONS                                DUE:                            

Input requirementsCapital used per unit of output:Labour used per unit of output
MANUFACTURE104
AGRICULTURE25
Factor EndowmentsCapitalLabour
HOME300200
FOREIGN200150

1:   EDGEWORTH BOX:  Use the information above.

(1 point)    a)   Define what we mean by capital-intensive and explain which sector is K-intensive.

(3 points)  b)   Find equilibrium production {QM, QA} and inputs {KM, LM; KA, LA} in Home.  You can do this using diagrams or math.  Try both.  Show your work.

(3 points)  c)   Find equilibrium production and input allocations{KM, LM; KA, LA; QM, QA} in Foreign.  Show your work.

(3 points)  d)   Sketch the Edgeworth box (or Lerner diagram) for Home and for Foreign.  Carefully label your diagram.

2:   RYBZYNSKI  THM:  Use the information above but suppose Home’s capital stock rises to 400 with L fixed at 200.

(1 point)    a)   What happens to equilibrium production {KM, LM; KA, LA; QM, QA} in Home?  Show your work and explain.  Give the intuition.

(1 point)    b)   State the Rybczynski theorem.

(1 point)    c)   Are the results consistent with the Rybczynski Theorem? Explain.

(2 points)  d)   What happens to equilibrium production {KM, LM; KA, LA; QM, QA} in Home if K rises to 600 and L rises to 400? 

3:   WORLD TRADE:  The factor proportions model assumes demand is identical across countries.  Use this and the information from (1) in your answer.

(2 points)  a)   Who will have higher manufacturing prices in autarchy?  Explain. (Hint: calculate and compare QM/QA)

(2 points)  b)   Based on (a) who has the higher (r/w) ratio in Autarchy?  Give the intuition.  (Hint: Use the S-S theorem.)

(1 point)    c)   State the H-O Theorem.

(1 point)    d)   Based on (a) what is the direction of trade?  Explain.  Does this conform to the H-O Theorem?

(3 points)  d)   What will be the effect of free trade on nominal and real returns (r/P and w/P) in HOME and in FOREIGN? Provide your rationale (HINT: state the SS Thm then use it.).

(1 point)    e)   Which group (labour or capital owners) will support free trade in HOME.  FOREIGN?  Explain.

TOTAL: 25 POINTS

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