HO model

5. A small open economy produces 2 goods, computer (C) and food (F) using capital (K) and labor (L) according to the following production functions:

=3/41/4 =1/43/4

The relative price of computer on world markets is fixed at ()=2 (no trade restrictions). This economy has a fixed endowment of capital and labor, and . All consumers share the same homothetic preferences.

a. Verify that the production functions satisfy the assumptions of constant returns

to scale to all factors and diminishing returns to a single factor. Which good makes relatively intensive use of capital? Why?

b. Derive the relative factor demands for each sector ( and as functions of relative factor returns ). Graph these relative demand curves on a single graph (clearly indicate the goods the curves relate to).