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Econ 441
Alan Deardorff
Problem Set 2
 Answers
HeckscherOhlin Model
Page 1 of 7
Problem Set 2
 Answers
The HeckscherOhlin Model
1.
Which of the following characterize the HeckscherOhlin 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 isoquantisocost 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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View Full Document Econ 441
Alan Deardorff
Problem Set 2
 Answers
HeckscherOhlin 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 leastcost technique of producing it.
That leastcost technique is the tangency between the unit
isocost line and the unitvalue 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.
 Spring '09
 GUAN

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