2.Consider a Ricardian model. Suppose the US's unit-labor requirement for timber is 3, its unit-labor requirement for video cassette recorders (VCRs) is 8 and it has 48 million workers. Suppose Japan's unit-labor requirement for timber is 6, its unit-labor requirement for VCRs is 2 and it has 48 million workers.

a. Which country has the absolute advantage in each good? Which the comparative advantage? Explain.

b. Calculate each country's autarky price ratio. Then make-up a plausible free trade price ratio. What are the levels of production and the pattern of trade when free trade occurs?

c. Calculate real wages for workers in both countries in autarky and free trade. Explain why everyone benefits from trade.

d. Suppose President of the US implements a costless technology improvement program which lowers the US unit-labor requirement for timber to 2. What effect would this have on world supply of timber? What effect would this have on the free trade price ratio? Explain how real wages would change in both the US and Japan.

3. Suppose it requires 10 units of labor and 5 units of land to produce a ton of steel while it requires 2 units of labor and 4 units of land to produce a ton of wheat. Suppose the price of steel is $300/ton and the price of wheat is $100/ton.

A. Graph the lines along which the price and production cost are equal for steel and wheat.

B. What is the equilibrium wage rate and rental rate on land?

C. Suppose the price of steel rises to $350/ton. Graph the effect of this change on a new graph and find the new equilibrium factor prices.

D. Calculate the percentage changes of each output and factor price?

E. Construct the appropriate magnification effect relationship for prices for this example.

4. Imagine a two good H-O economy which imports automobiles and exports wheat. Suppose the production of these two goods use only capital and labor. If the government raises a tariff on the import of automobiles it will raise the domestic price of autos. Suppose the price of wheat remains constant.

A. Apply the magnification effect on prices to explain who in the economy will gain and who will lose because of the tariff? Be sure to state any additional assumptions needed to answer the question.

B. Are the effects described in part A short-run effects or long-run effects? Briefly explain why.

5. Suppose the domestic supply and demand curves for running shoes in the U.S. are,

S = 10P - 300

D = 3000 - 20P

Let the free trade price be $50.

A. What is the equilibrium quantity of imports.

Suppose a specific tariff of $10 per pair of shoes is imposed. Assume that the U.S. is a "small" country.

B. Depict the price effects of the tariff graphically on a US supply and demand diagram.

C. Calculate the domestic welfare effects.

D. What import quota could be levied to generate the same price effects? Explain how the welfare effects of the quota may differ from the tariff.

E. Suppose instead that a voluntary export restraint is negotiated and set at the same quantity as in part (d) above. Calculate the welfare effects of the VER. How does it differ from the import quota and the tariff?

F. Give two reasons why VERs may be implemented rather than import quotas or tariffs. Explain.

6. An application of the specific factor model (20 points).

Hangzhou city in Zhejiang Province and Nanjing city in Jiangsu Province share a similar industry structure and are always in competition. Let's suppose Hangzhou and Nanjing both produce a single product. Producing the product requires two factors: capital and labor. The capital supply in each city and the technology of production are exactly the same. The marginal product of labor in each city depends on employment as follows