Consider a specific-factors world consisting of two countries, Home (H) and Foreign (F), and two goods,...

Consider a specific-factors world consisting of two countries, Home (H) and Foreign (F), and two goods, coffee (C) and doughnuts (D). Home has 120 units of labour that are mobile between industries and immobile internationally, some capital owners that are involved in doughnut production and some landowners that are involved in coffee production. Capital and land is immobile between industries and internationally. The marginal product of labour in each industry is given by MPLC = 120 − LC and MPLD = 120 − LD . Both markets are perfectly competitive and all labour is employed. In autarky, the price of coffee and doughnuts are each $1.

g. Calculate how much money labour receives in autarky.

h. Calculate how much money capital owners receive in autarky. (Hint: if you draw the diagram for the specific factors model, the money capital owners receive is the triangle above the wage paid in the industry in which capital is used and below the value of marginal product curve in the industry in which capital is used.)

i. Calculate how much money landowners receive in autarky. (Hint: if you draw the diagram for the specific factors model, the money landowners receive is the triangle above the wage paid in the industry in which land is used and below the value of marginal product curve in the industry in which land is used.)

After Home opens to trade, it discovers that the world relative price is 2 (ie, C = 2 ). For simplicity, pD assume that the price of doughnuts remains unchanged.

j. Derive an equation for Home’s new value of marginal product of labour in coffee.

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Rahul Sunny answered 1 year ago

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