c.
Suppose instead that the amount of capital increases to 125 due to FDI, keeping
the total number of workers ±xed at 100. Again solve for the amount of labor
and capital used in each industry.
Hint:
Redo the calculations from part (a), us
ing
K
C
1
K
S
5
125.
Answer:
The ±rst labor equation is now 2
?
L
C
1
0.5
?
L
S
5
125, so the labor
equations are solved as:
2
?
L
C
1
0.5
?
L
S
5
125
2
2
?
L
C
1
2
?
L
S
5
200
2
1.5
?
L
S
52
75
so that
L
S
5
75 / 1.5
5
50. It follows from the same equations that
L
C
5
50,
and that
K
C
5
2
?
L
C
5
100 and
K
S
5
0.5
?
L
S
5
25.
d.
Explain how your results in parts (b) and (c) are related to the Rybczynski the
orem.
Answer:
Comparing part a with part (b), the increase in the amount labor in the
economy has increased the amount of labor and capital devoted to shoes (from
L
S
5
66.7 and
K
S
5
33.3 to
L
S
5
100 and
K
S
5
50) and decreased the amount
of labor and capital devoted to computers (from
L
C
5
33.3 and
K
C
5
66.7 to
L
C
5
25 and
K
C
5
50).Therefore, the output of shoes increases and the output
of computers decreases, due to the overall increase in labor. Shoes are laborin
tensive because they use 0.5 units of capital per unit of labor, computers are cap
italintensive because they use 2 units of capital per unit of labor. So the change
in outputs is in accordance with the Rybczynski Theorem: the increase in labor
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 Fall '11
 LuChang
 Microeconomics, International Economics, rybczynski theorem, Movement of Labor

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