5. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows: Components: Total costs of production = PC • QC = 100 Earnings of high-skilled labor = WH • HC = 25 Earnings of low-skilled labor = WL • LC = 25 Earnings of capital = R • KC = 50 Share of total costs paid to highskilled labor = 25/100 = 25% Share of total costs paid to lowskilled labor = 25/100 = 25% R&D: Total costs of R&D = PR • QR = 100 Earnings of high-skilled labor = WH • HR = 30 Earnings of low-skilled labor = WL • LR = 20 Earnings of capital = R • KR = 50 Share of total costs paid to highskilled labor = 30/100 = 30% Share of total costs paid to lowskilled labor = 20/100 = 20%

a. In which factor(s) is components intensive? In which factor(s) is research intensive?

b. Suppose that due to the opening of trade, the relative price of R&D increases, DPR/PR = 10%, whereas the price of components stays unchanged, DPC/PC = 0. Calculate the change in the relative wage of high-skilled and low-skilled labor.

c. What has happened to the relative wage of high-skilled/low-skilled labor? How does this result compare to Problem 4, and explain why it is similar or different.