(a) Use the figure above for HOME. Assume MANU uses capital (K) and AG uses land (T) as their specific factor. Let labour be mobile. Label the figure and explain how to determine the equilibrium Labour Allocations and returns to labour, capital owners, and land owners. Be sure to define equilibrium, explain the process, and give the details. (Hint: use the labeled areas to the wage bill, revenues, and returns to capital and land.)

(b) Now suppose Home and Foreign open to free trade. Assume that they have identical demands. Based on the figures, who would export Manufactures and import Ag products? Explain.

(c) As we move from Autarchy to Free Trade, what happens to income inequality in Home? Does it rise or fall. Explain.

(d) As we move from Autarchy to Free Trade, what happens to income inequality in Foreign? Does it rise or fall. Explain.

 

PART B: do 2 of 3 questions B1: SPECIFIC FACTORS MODEL I. A B B C HOME FOREIGN D F E ..20 points D E 11