PS04-2CG - Econ 441 Summer Term 2002 Alan Deardorff Problem...

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Econ 441 Alan Deardorff Summer Term 2002 Problem Set 4 Page 1 of 3 Problem Set 4 Two-Cone Model and Gains from Trade 1. The graph below shows unit value isoquants for three goods, X 1 , X 2 , and X 3 , based on prices that are assumed to prevail throughout a world of many countries with free trade. Also shown are points representing the factor endowments of several countries, E 1 , E 2 , etc. Complete the two-cone Lerner diagram to identify the factor prices, factor ratios, and vectors of factors that will be employed in each sector by each country, and use these to answer the following questions: a. In which country or countries will the wage in units of good X 1 , be highest, and in which will it be lowest? Would the answer be any different for the wage in units of goods X 2 or X 3 ? b. Which country will produce the largest quantity of each good? c. Which country will produce the largest ratio of good X 3 to good X 2 ? d. (Hard) Which country has the largest national income? e. Suppose that consumer preferences in the world were to shift towards good 2 so
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PS04-2CG - Econ 441 Summer Term 2002 Alan Deardorff Problem...

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