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161 Prob Set 3

# 161 Prob Set 3 - ProblemSet3 TuftsUniversity Spring2012...

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Problem Set 3 EC 161 International Trade Tufts University Spring 2012 Prof. Fusillo Please answer all questions. The due date is March 5 th 1. Starting from equilibrium in the specific factors model, suppose the price of manufactured goods falls so that wages fall from W’ to W as in Figure 3 5 of your F&T textboook. a. Show that the percentage fall in wages is less than the percentage fall in the price of manufacturing, so that the real wage of labor in terms of manufactured goods goes up. b. What happens to the real wage of labor in terms of agriculture? c. Are workers better off, worse off, or is the outcome ambiguous? 2. Use the following information to answer the questions below: Manufacturing: Sales revenue = P M Q M = 150 Payments to labor = W L M =100 Payments to capital = R K K= 50 Agriculture: Sales revenue P A Q A =150 Payments to labor = WL A =50 Payments to land = R T T = 100 Holding the price of manufacturing constant, suppose the increase in the price of agriculture is 10% and the increase in the wage is 5%.

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