Hecksher-Ohlin with Leontief Technology. Consider a country that produces clothing (C) and food (F) using capital (K) and labor (L). The techniques of production in each industry are Leontief with fixed unit input requirements given by

a_KC = 2 a_KF = 3

a_LC = 2 a_LF = 2

(a) What do the isoquants look like for each industry? How does the capital-labor ratio in each sector respond to changes in the relative wage w/r?

(b) Find the capital-labor ratio in each industry. Which industry is capital intensive?

(c) Suppose that the world price of clothing is $12 and the world price of food is $16. Assume that the country produces both goods. What are the factor price levels w and r when the country is open to free trade?

(d) What are the associated cost shares in each industry?

(e) Suppose the world price of food falls to $14. What is the new relative wage? What theorem could you have used to predict the direction of the change in the relative wage?

(f) What happens to the cost shares in the two industries after the price of food falls?