We are under the setting of HO model. Assume home and foreign have the same labor endowment (L=L*) and foreign has a larger capital endowment than home (K

(Note that homothetic preference means that given price, increase in income will induce the same proportion increases in consumptions of goods.)

(1)

In two separate figures, show the production possibility frontiers of home and foreign. Also show the autarky equilibrium points in the two countries.

(2)

We now allow the two countries to free trade. The free trade equilibrium price is in between of the autarky equilibrium prices in the two countries,

(pc^a* /ps^a* )<(pc^w/ps^w)< (pc^a/ps^a). Let us focus on the factor market

at Home. Write an equation of the relationship between the relative supply of capital K/L and the relative demand of capital in the two sectors.

(3)In a graph, draw the relative supply and relative demand of capital (in the two sectors and for the whole economy) at Homeautarky equilibrium.

(4)

Based on the graph from 3), show how free trade changes the equilibrium factor prices and factor intensity in production in the two sectors at Home.

(5)

For Home, does the car sector become more capital intensive with free trade than in the autarky equilibrium? Does the shoe sector become more capital intensive with free trade than in the autarky equilibrium? Are the two sectors factor intensities moving in the same direction? If yes, explain how possible that both sectors become more labor (or capital) intensive, while the economy total endowment of labor and capital fixed.

(6)

At Home, are workers better off from trade? Are capital owners better off from trade? Explain why.