1.Suppose that Italy is able to produce two kinds of good: car and tomato. The production of the goods requires a different mix of labor and capital. The production of tomato needs relatively more labor than car production does while to produce cars people need relatively more capital than tomato industry does.

a.Graph how the factor proportions will change in production if the relative price of car increases. What can you say about the welfare change of the factor owners?

b.Suppose that immigrants from Africa are flooding Italy which means higher possible laborforce for Italy. Draw two different figures about the changing structure of production in the country.

c.The Italian government decides on opening the markets and starts to trade with Hungary where the same kinds of food are produced. It is also known that the world market consists of these two countries. Italy owns a capital stock of 300 million euros and a labor force of 25 million people, while Hungary can utilize 81 million euros and 4 million people in the production. Determine the export and import structure of the countries?

d.Compare the welfare of the factor owners in case of free trade with that in case of closed economies.

e.Let us assume that due to foreign investments the supply of capital in Hungary grows ceteris paribus that triggers economic grows. What happens with the Italian terms of trade? Is it good or bad for the Italian economy?