# PS02a-HO - Econ 441 Problem Set 2 Answers Alan Deardorff Heckscher-Ohlin Model Page 1 of 7 Problem Set 2 Answers The Heckscher-Ohlin Model 1 Which

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Econ 441 Alan Deardorff Problem Set 2 - Answers Heckscher-Ohlin Model Page 1 of 7 Problem Set 2 - Answers The Heckscher-Ohlin Model 1. Which of the following characterize the Heckscher-Ohlin Model? a. Perfect mobility of factors across industries Yes b. Perfect mobility of factors across countries No c. Constant returns to scale Yes d. The law of diminishing returns Yes e. Identical technologies across industries No f. Identical technologies across countries Yes g. Monopolistic competition No h. Perfect competition Yes i. Full employment Yes j. Balanced trade Yes k. Factor intensity reversals No (These are assumed not to occur.) l. Identical homothetic preferences Yes (This is not a necessary assumption for all results of the model, but it is an assumption that we will routinely use.) 2. Suppose that the price of a good, X , is 0 X p and that potential producers of that good in a country face factor prices w 0 and r 0 . The three figures below show three ways that these prices might appear in an isoquant-isocost diagram. What can you say, in each case, about what will happen in the X industry in this country? That is, will the good be produced, can these prices constitute an equilibrium, and if so, what technique of production will be used to produce X ? This says that a dollar’s worth of X requires more factors than can be bought with one dollar. Therefore good X will not be produced at these prices. a) L 0 / 1 X p X = 1/ w 0 1/ r 0

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Econ 441 Alan Deardorff Problem Set 2 - Answers Heckscher-Ohlin Model Page 2 of 7 Here producers of X exactly break even, spending one dollar on factors that will produce one dollar’s worth of X, if they use the least-cost technique of producing it. That least-cost technique is the tangency between the unit isocost line and the unit-value isoquant, and it therefore uses 0 X L and 0 X K to produce one dollar’s worth of X. (Unless 1 0 = X p , this is not one unit of X itself, so these are not the unit factor requirements a LX and a KX . We cannot determine these from the information given.) Here, all of the points on the isoquant inside the isocost line are ways to produce a dollar’s worth of X at a cost of less than one dollar, thus making a profit. This situation will attract entry into the industry, seeking this profit, and will continue to do so until either the factor prices change (at least one of them rising due to the increased demand for factors) or the price of X falls (due to the increased supply of X). This cannot be an equilibrium situation. 3.
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## This note was uploaded on 04/15/2009 for the course ACCOUNTING BUSI0027 taught by Professor Guan during the Spring '09 term at HKU.

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PS02a-HO - Econ 441 Problem Set 2 Answers Alan Deardorff Heckscher-Ohlin Model Page 1 of 7 Problem Set 2 Answers The Heckscher-Ohlin Model 1 Which

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