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Problem_Set_3 - Economics433: Prof. WinterSpring,2009...

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Economics 433: Advanced International Trade Prof. Alexander Monge-Naranjo Winter-Spring, 2009 Problem Set 3 Due March 3 rd , 2009 at the beginning of class. Please print this problem set out and work directly on it. If necessary, you may attach extra  sheets. Be sure to show your work on all questions that require a numerical response. Name __________________________________________________________________
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QUESTION 1 (10 points) Imagine a country country with K =1400 and L = 200. There are two two goods, X and Y using two factors, L and K. Y is capital intensive relative to X. P is the international relative price of Y, i.e. P=pY/pX. The factor prices are w and R. Assume that the relationship between P and w/R is depicted in the next table: P=pY/pX w/R 1 11 2 9 3 7 4 5 5 1 Moreover, assume that technology choices in each industry are such that: w/R K/L in X K/L in Y 11 8 12 9 5 10 7 3 9 5 2 8 1 1 7 a) Imagine that initially the world price p is equal to 2. What is the equilibrium w/R? What is the allocation of labor between the two industries? What is the factor intensity in each industry?
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