Part II [Analytical Ereroise] Carefully read through each question and provide your answers. Make sure that you show your own argument and work. 1. {Specic Factors Model] Cruztcpia is a small open economy which produces clothing and food (clothing with capital (K) and labor [Lg]; food with land {T} and labor {LFD- Capital and land are xed factors while labor can move between sectors (Lg+LF = L}. The production technology in each sector demonstrates constant returns to scale with diminishing returns of marginal product of each factor and factor complementarity. Consumers in this economy exhibit homothetic preferences. (a) Characterize an autarl-ry equilibrium for Cruetcpia. (b) Graphically represent the autarky equilibrium with quantity of production in clothing Q0 on the xasds and quantity of production in food QF on the y-aacis. r Cruztopia opens up to free trade and observes a relative world price (g?) . Let us further assume that the relative world price is higher than in the autarky re (a >~ (a? ative price, (c) How does the equilibrium production and consumption change with trade? Show on the graph how openness to trade affects consumersJ utility. l'iigainl put quantity of production in clothing Q0 on the xaxis and quantity of production in food (2;: on the y-axis. (d) How does the change in production affect factor allocations? {e} Examine the changes in real returns for the workers in each sector (P'L'c, 31."), the real returns for the capital owners in the clothing sector (1%, it), and the real rental rate of land in the food sector (Pic: ). What are the key assumptions on the production technology that drive the change in each result? Policy makers are considering the imposition of a NW} tariff on food. This tariff would raise the price of food in the country by 1|}% and would not affect the price of clothing. (f) What is the effect of this tariff on the world relative price? (g) Who benets from the tariff policy compared to free trade? Again, examine the changes in real returns for the workers in each sector (, i), the real returns for the capital owners in the clothing sector (gC, ELF): and the real rental rate of land in the food sector (, Pip) Let us consider again, lCruztopia under autarky and further assume that the economy acquires additional land. (b) Show on a graph how the autarky equilibrium production and consumption would change compared to part {b}. Hint: There is no change in. the entering price! [i] Examine the changes in real returns for the workers in each sector (P\", 31."), the real returns for the capital owners in the clothing sector (gC, PLF), and the real