1. Suppose Austeria is a small open economy that produces agricultural and manufac turing products. The country decides to designate "special economic zones" that will grant foreign firms low taxes and other economic incentives. This makes Aus- teria very attractive for multinational firms, and soon they start to receive large amounts of in greenfield foreign direct investment. (a) Suppose that Land (7) is specific to to agriculture and capital (K) is specific to manufacturing in the short run, whereas labor (L) is free to move between the two sectors. Using a short run specific factors model, determine the impact of the FDI on the output of each industry, and equilibrium wage. Examine the impacts on real rental rates of capital and land. (10) (b) Consider a model with two factors, capital and labor, where each factor is perfectly mobile across two sectors in the long run. Agriculture is relatively intensive in labor, and manufacturing is relatively intensive in capital. Ex- amine the effect of FDI using a long run Heckscher-Ohlin model. Discuss the differences between long run and short run predictions. (10) 2. The industry for refrigerators is characterized by monopolistic competition. Suppose that the cost function of the firm producing refrigerators in the Home (H) country is given by C(Q) = 2, 000Q + 1, 000, 000. The residual demand curve of the firm is: Q = S( - 100 ( P - P) ) (1) Suppose there are n identical firms in the industry, and S is the market size, and P is the average price in the industry. The market size in the Home country is 30 million people. Assume that all firms are identical, except that each firm produce a different variety of refrigerator. (a) Derive the AC curve, profit maximizing price, and equilibrium profits for a representative firm. Show all steps of derivation. Explain how the profits of an individual firm depend on the number of firms in the industry. Illustrate the long run equilibrium on a diagram. (10 points)