Thespecific factor modelassumes that an economy produces two goods using two factorsof production, such as capital and labor, in a perfectly competitive market. One of the twofactorsof production, typically capital, is assumed to bespecifictoa particularindustry.

Under the specific factor model.

Suppose that when the Home country opens up to trade, the price of the M good relative to the A good decreases, and we assume that this relative price increases.

(a)Draw a figure to show the production and consumption choices of the Home country.

(b)Which good is exported and which good imported? Why?(c) (5 points) How does the opportunity cost of the M good change, going from closed economy to free trade? Why?

(d)Are capital owners better-off or worse-off? Explain.

(e)How does the purchase power (real wage in terms of both M and A goods) of workers change? Explain.

(f) Explain why the overall gains from trade are still positive.