191hw1sol

191hw1sol - ECON191 Spring 2009 Outline of suggested...

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1 ECON191 Spring 2009 Outline of suggested solutions to Problem Set 1 1) Poor country s Capital flows into the poor country b More firms will operate and demand for labor increases (demand curve shifts out in the diagram) b Wage rate of labor increases in the poor country and workers are better off s Return to capital in the poor country may go down because foreign investors have hired away some of the workers b Domestic investors are not better off and may be worse off s Income inequality narrows in the poor country Rich country s Capital flow out of the rich country b Demand for labor in the rich country drops (demand curve shifts in) b Wage rate for labor decreases and workers are worse off in the rich country s Return to capital in rich country increases because part of the capital has left (MPK goes up when K goes down). Investors are better off in the rich country. s Assume that investors are generally richer than workers. Income inequality widens in the rich county 2) s Difficult to raise quantity supplies in the short run
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This note was uploaded on 10/11/2009 for the course ECON 191 taught by Professor Chen during the Spring '08 term at HKUST.

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191hw1sol - ECON191 Spring 2009 Outline of suggested...

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