1.Consider the following two-country model with specific factor being capital in both X-sector and Y-sector but labor is mobile between two sectors. Assume X is more capital-intensive good than Y. And assume Home country is more labor abundant than Foreign country. Therefore, Home country exports Y good and imports X good while Foreign country exports X good and imports Y good. So Heckscher -Ohlin theorem applies. But capital is fixed and sector-specific. Home country's capital is K and K= Kx +Ky and Foreign country's capital is K* and K*=Kx* +Ky*. Assume that all capitals (Kx, Ky, Kx*, Ky*) are sector-specific and therefore cannot move between sectors.

Consider demand for labor curves (Value of Marginal Product of Labor(VMPL)

curves) in X industry and Y industry are as follows:

W = 100 - LxandW= 100 - LyL= 100 =Lx +Ly

where W = wage rate and L =total labor in Home Country and Lx =labor hired in X industry and Ly = labor hired in Y industry

Figure 5.2 in the textbook is copied below where horizontal line is Total Labor Supply in Home Country and vertical lines are wage level (W) in X industry on the left-hand side and wage level in Y industry on the right hand side.

Wage Wage rate rate ( VMPC ). D B E H A A VMPC VMP F OF LF G' G Lo OC Total labor supply olve for autarky equilibrium level of labor at X industry (Lx) and Y industry VL LX= Ly=