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Problem Set 2

# Problem Set 2 - Prof Anca Cristea EC 481/581 Winter 2013...

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Prof. Anca Cristea EC 481/581 Winter 2013 Problem Set 2 Due Date: January 31, 2013 PART A: Specific Factor Model 1. In the specific factors model examined in class, assume that the price of the agricultural good decreases while the price of the manufactured good remains unchanged (i.e., Δ P A /P A <0 and Δ P M /P M = 0). a. (10 points) Draw the ‘Bucket’ diagram showing the change in labor allocation and wages. b. (10 points) Using information from the diagram, arrange the following terms in ascending order: Δ P A /P A Δ P M /P M Δ R T /R T Δ R K /R K Δ W/W Be sure to explain your answer. 2. Suppose two countries, Canada and Mexico, produce two goods: timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When Canada and Mexico engage in free trade, the relative price of televisions falls in Canada and the relative price of timber falls in Mexico.

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