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Econ 441
Alan Deardorff
Problem Set 3
 Answers
HeckscherOhlin and 2Cone Model
Page 1 of 14
Problem Set 3 
Answers
HeckscherOhlin and TwoCone 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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Alan Deardorff
Problem Set 3
 Answers
HeckscherOhlin and 2Cone Model
Page 2 of 14
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. The Edgeworth Box below shows the contract curve
of a country as well as a particular allocation,
A
0
, along that contract curve at which the
country would produce, given certain prices,
0
C
p
and
0
F
p
.
Its outputs at
A
0
are
C
0
and
F
0
.
A
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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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