3. (40 marks) Suppose Country A produces clothing (C) and electrical appliances (E). Both goods use labor and capital in production. The unit labor (L) and capital (K) input requirements of clothing and electrical appliances are: aLC = 3, aLE = 4, akc = 2, and aKE = 6 Suppose both goods are produced both before and after trade. a. Which good is capital intensive? Why? b. Since the markets are competitive, write out the zero profit conditions for the two industries. c. Suppose that before trade, the good prices in country A at PE = 10 and Pc =5 while the prices in country B are Pc* = 5 and PE =12. The two countries have identical relative demand DE/ Dc. If A and B open up to international trade, what will be the pattern of trade between the two countries? d. How would trade influence the factor prices in country A (you may assume that only pc changes while PE is fixed)? e. Does trade make the workers and the capital owners of country A better off or worse off? Consider w w r r where w and r are the wage and rental, respectively. pc' PE PC PE