1. (Simplified version of Heckscher-Ohlin model). Consider a country which can produce two goods: manufactures (M) and food (F) using two inputs: labor (L) and capital (K). Production of each good requires inputs to be used in fixed proportions as follows (these are called Leontieftechnologies):

To produce food (F): 2 units of labor and six units of capital are required for each unit of F. To produce manufactures (M): 6 units of labor and 2 unit of capital are required for each unit of M.

Let L, K represent the total amount of labor and capital available in the economy, let Pf , Pm denote the prices of output, and let W, R denote the prices of labor and capital, respectively.

a) Find production costs and hence output price (price=marginal cost) for each good in terms of factor prices (W, R). {Hint: To produce Qm units of M requires 6Qm workers and 2Qm units of capital; hence total costs are {WLm + RKm}={6W +2 R}Qm }.

i. Use your answers to solve for input prices in terms of output prices. How will an increase in the price of food affect factor prices?