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Spring 2010 Mine Zeynep Senses International Trade Theory [email protected] Practice Problem Set 5: Hecksher-Ohlin Model II Questions 1 and 2 will be solved in tutorials this week. 1. Suppose Springland is producing two goods, Wine (W) and Cheese (C), with two factors of production: Labor (L) and Capital (K). The quantities of L and K used to produce one unit of each good are given as below: Labor hours used to produce 1 unit Capital hours used to produce 1 unit Wine 4 1 Cheese 3 2 Springland has 1,200 thousand L and 400 thousand K: a) Please plot the country’s PPF. b) If Pw = Pc = \$10, how many units of wine and cheese will Springland produce? c) Now due to business-friendly policies, Springland attracts 200 thousand more K from abroad: i) Please graph the country’s new PPF; ii) If prices of both goods stay the same, how many units of wine and cheese will Springland produce now? Is your answer consistent with the Rybczynski theorem? iii) If due to regional unrest, all foreign K and part of domestic K moved

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