Specific Factors Model

Consider the economy of Sardinia. It produces wine and cork using labor and two types of land (low and high). Low land can only be used in the production of cork, whereas high land can only be used in the production of wine. The marginal products of labor in the two sectors areMPLW=120LWandMPLC=120LC, for wine and cork, respectively. In Sardinia there are 120 workers, 100 cork producers and 100 wine producers. Workers move freely across sectors. In autarky the prices of the two goods are the same and equal to 1 euro.

3.1What are the quantities of each type of land allocated to the production of the each good in autarky? Use the assumptions of the model explicitly to answer the question.

3.2What are the quantities of labor allocated to the production of each good in autarky? Use the assumptions of the model explicitly to answer the question.

3.3What are the quantities produced of each good in autarky? Start by illustrating this diagram- matically (for one good), and then compute the quantities produced of the two goods.

3.4Suppose Sardinia joins free trade. Assume that, relative to autarky, the free-trade equilibrium the price of cork is higher by 300% and the price of wine by 200%. Calculate the free-trade equilibrium wages.

3.5Do workers gain from trade? Illustrate graphically the gains from trade for every individual worker. Calculate precise numbers for the slope and the intersections with the axes of the curves that you decide to plot.

3.6Do owners of low and high land gain from trade?Quantify the change in each type of landowner's welfare.