ECN 340 Soultion_to_Ch7_Q1

ECN 340 Soultion_to_Ch7_Q1 - Foreign Outsourcing of Goods...

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Unformatted text preview: Foreign Outsourcing of Goods and Services 1. Consider an outsourcing model in which the labor hours of four activities in the United States and Mexico are as follows: Note that labor hours in Mexico are four times those in the United States, reflecting Mexicos lower productivity.Also note that the ratio of skilled to unskilled labor used in each activity increases as we move to the right, from 1/5 in assembly to 10/1 in R&D. Suppose that the wage of U.S. unskilled workers is $10 per hour and that of skilled workers is $25 per hour and that the wage of Mexican unskilled workers is $1 per hour and that of skilled workers is $5 per hour (these values are made up to be con- venient, not realistic).Also suppose that the trade costs are 25%, 30%, or 50%, which means that an additional 25%, 30%, or 50% is added to the costs of outsourcing to Mexico. a. Fill in the blank cells in the following table by computing the costs of produc- tion of each activity in each country (two cells are filled in for you)....
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This note was uploaded on 02/09/2012 for the course ECN 340 taught by Professor Luchang during the Fall '11 term at Michigan State University.

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ECN 340 Soultion_to_Ch7_Q1 - Foreign Outsourcing of Goods...

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