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ECN 340Solution_to_Ch5_Q7

# ECN 340Solution_to_Ch5_Q7 - S037-S048-Ch05-SM.qxd 3:42 PM...

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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 labor-in- tensive because they use 0.5 units of capital per unit of labor, computers are cap- ital-intensive 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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ECN 340Solution_to_Ch5_Q7 - S037-S048-Ch05-SM.qxd 3:42 PM...

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