Suppose only one technique can be used in the production of clothing and food described as follows. To produce one unit of clothing, four units of labour and one unit of capital are required; in food production, each unit requires a single unit of labour and a unit of capital. In the initial equilibrium, suppose that the wage rate and the capital income have a value of EUR2 each.

(i) If both goods are produced, what must their price be?

(ii) Now keep the price of food constant and increase the price of clothing to EUR15. What is the new level of w and r?

(iii) Calculate and order the relative changes in the wage rate, capital income, the price of clothes, the price of food (in the latter there is no change).

(iv) If the price shock is due to the opening to international free trade and the assumptions of the Heckscher-Ohlin model are valid, can we say if this country is abundant in labour or in capital?