please solve part (c)
Answer for part (a) and (b)
3. [60 marks, equal weights for all subquestions Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cars (c) and pharmaceutical drugs (d), and three factors, capital K, skilled labour S, and unskilled labour L. The production functions are given by F.(K., L.) = K L and Fe(Kd, Sa) = Kjs) 1 That is, skilled labour is specific to pharmaceutical drugs, and unskilled labour to cars. Suppose that the countries' factor endowments are K" 2 - KPL and I = 3/2, and SH = 1 and SF 1/2, so that the total labour force is 2 in both countries. The price of capital is denoted by r, the price of skilled and unskilled labour by w, and wr. Denote the goods prices by p. and pd, and normalise Pa = 1 for simplicity The demand for cars and drugs in country : =H. F is given by , and 2Y and 2 1 372 where y denotes aggregate income in country ). (a) Draw or compute the PPFs of Home and Foreign. (b) Derive the autarky equilibrium in Home, showing that K" = 4/3 and p = V2. (e) Compute the autarky equilibrium in Foreign and show that pl > Compare equilibrium prices in Home and in Foreign and explain. (d) With free trade in both goods c and d, which good will Home export, and will skilled or unskilled workers be better off? Explain or compute. (e) Suppose that there is now both free international trade in goods and also in the factor capital, i.e. capital is mobile between the two countries and the two industries, and that the world market price : > 1. Compare the resulting world market equilibrium allocation to nutarky and to free trade in goods (verbal explanation or computation). (1) Suppose that now that Foreign has a production technology F! (KS) = 26. 1. and R! (L., Sa) = 2K s} Describe the effect of free trade in goods but not factors (compared to autarky) in terms of the resulting world market equilibrium good price and wages (explain, no computation needed). Answer: Since it is a specific-factor model let us assume, both sectors use land, land is specific for cultivation and capital is specific to manufacturing so, PPF is curved there would be diminishing returns to labor short-run model because the capital cant move between industries. The production frontier for this economy is strictly concave. This reflects the diminishing the marginal product of labor. As we move down the PPF, we are adding more labor to a fixed factor (K1) in cars, so change in cars gets smaller with each additional unit to labor transferred from X2. The car sector uses K and S, and the drug sector uses K and U. Each type of Labour is of no use (zero productivity) in the other sector. drugs PPP of two countries home and F Foreign H H cars F 3. [60 marks, equal weights for all subquestions Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cars (c) and pharmaceutical drugs (d), and three factors, capital K, skilled labour S, and unskilled labour L. The production functions are given by F.(K., L.) = K L and Fe(Kd, Sa) = Kjs) 1 That is, skilled labour is specific to pharmaceutical drugs, and unskilled labour to cars. Suppose that the countries' factor endowments are K" 2 - KPL and I = 3/2, and SH = 1 and SF 1/2, so that the total labour force is 2 in both countries. The price of capital is denoted by r, the price of skilled and unskilled labour by w, and wr. Denote the goods prices by p. and pd, and normalise Pa = 1 for simplicity The demand for cars and drugs in country : =H. F is given by , and 2Y and 2 1 372 where y denotes aggregate income in country ). (a) Draw or compute the PPFs of Home and Foreign. (b) Derive the autarky equilibrium in Home, showing that K" = 4/3 and p = V2. (e) Compute the autarky equilibrium in Foreign and show that pl > Compare equilibrium prices in Home and in Foreign and explain. (d) With free trade in both goods c and d, which good will Home export, and will skilled or unskilled workers be better off? Explain or compute. (e) Suppose that there is now both free international trade in goods and also in the factor capital, i.e. capital is mobile between the two countries and the two industries, and that the world market price : > 1. Compare the resulting world market equilibrium allocation to nutarky and to free trade in goods (verbal explanation or computation). (1) Suppose that now that Foreign has a production technology F! (KS) = 26. 1. and R! (L., Sa) = 2K s} Describe the effect of free trade in goods but not factors (compared to autarky) in terms of the resulting world market equilibrium good price and wages (explain, no computation needed). Answer: Since it is a specific-factor model let us assume, both sectors use land, land is specific for cultivation and capital is specific to manufacturing so, PPF is curved there would be diminishing returns to labor short-run model because the capital cant move between industries. The production frontier for this economy is strictly concave. This reflects the diminishing the marginal product of labor. As we move down the PPF, we are adding more labor to a fixed factor (K1) in cars, so change in cars gets smaller with each additional unit to labor transferred from X2. The car sector uses K and S, and the drug sector uses K and U. Each type of Labour is of no use (zero productivity) in the other sector. drugs PPP of two countries home and F Foreign H H cars F
