Question
Consider a hypothetical world with two countries: A and B. All the general assumptions of the specific-factors model hold in this hypothetical world. Country A
Consider a hypothetical world with two countries: A and B. All the general assumptions of the specific-factors model hold in this hypothetical world. Country A has a comparative advantage in the production of good 1 and country B has a comparative advantage in the production of good 2. Both industries use constant return to scale production technology. Country B'sproduction technology in industry 1 is described by the production function , where is the output of good 1, is the capital input and is the labor input in industry 1. Country B's production technology in industry 2 is described by , where is the output of good 2, T is the land input and is the labor input in industry 2. Labor is perfectly mobile across industries.
1)Derive the real wageof countryB's workers in terms of good 1 and good 2.
2)Analyze the impact of trade on the real wage of countryB's workers in terms of good 1 and good 2.
3)Assume a worker owns 1 unit of labor.Write down the budget constraint of a worker in countryB.Draw the change in the budget constraint ofthis workerwhen countryBmoves from autarky to free trade(good 1 on the horizontal axis). Comment on the welfare changes ofthis worker.
***I have done 1) and 2). I only need the answer to 3).
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