Ps4 - factor price ratio w/r where w is the wage and r is the rental price of capital Suppose the relative price of airplanes increases Show how

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ECONOMICS 450: INTERNATIONAL TRADE FALL 2011 MARK MOORE PROBLEM SET 4 A. Do the problems in chapter 5 of the text. B. Consider a world with two goods – tshirts and airplanes, 2 factors – capital and labor, and 2 countries – Home and Foreign. Home is capital abundant and airplanes are capital intensive. Tshirts and airplanes are each produced with capital and labor with a constant returns to scale production technology. Home and Foreign have access to the same technology. There are no transport costs and no policy interferences with trade. The endowments of capital are K (Home) and K* (Foreign). The endowments of labor are L and L*. i. Using the appropriate diagram, show how the relative price of airplanes determines the
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Unformatted text preview: factor price ratio, w/r, where w is the wage and r is the rental price of capital. Suppose the relative price of airplanes increases. Show how the factor price ratio changes. How does the relative price change affect the welfare of capitalists and workers? ii. Suppose that after trade the Home economy completely specializes in the production of airplanes. Under what conditions (qualitatively) will this occur? Explain. How will the factor price ratio be determined at Home? {Hint: think about the MPL and the MPK at Home.) Will the factor price ratio in the Home economy be the same as the factor price ratio in the Foreign economy? Explain. C. Do problems 5-7 in chapter 4 of the text....
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This note was uploaded on 11/21/2011 for the course ECON 404 taught by Professor Carrillo during the Spring '11 term at USC.

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