Question

Assuming a Heckscher-Ohlin framework, suppose the production of a gallon of Wine and a pound of Cheese require the following units of Labour and Land: Goods Units of labour Units of land Wine per gallon 10 5 Cheese per pound 4 8 a. If the unit prices of wine and cheese are £30 and £16 respectively, show that, in a competitive economy, wages and rent cannot be 2 and 3 respectively. b. If the unit prices of wine and cheese are £30 and £16 respectively, graph (in wage and rent space) the lines along which price equals marginal cost for each of the two goods. c. Using your graph, determine the factor prices of land and labour. d. If the price of cheese increases to £24 per pound, what happens to factor prices? e. How will the purchasing power of workers and landowners be affected by an increase in the price of cheese?

Answer 1

Answer:

Goods	Units of labour	Units of land
Wine per gallon	10	5
Cheese per pound	4	8

a. If the unit prices of wine and cheese are £30 and £16 respectively, show that, in a competitive economy, wages and rent cannot be 2 and 3 respectively

P_w = 30 pound

P_c = 16 pound

Under perfect competition in competitive economy, Marginal Revenue (MR) should be equal to Marginal Cost (MC)

MR = Price * quantity

Suppose Wage per labour unit = W and Rent per land unit =R

Here we consider 1 unit of production hence

MR = P_w *1

From the above given data:

=> P_w = 10W +5R ---------------------------------------------(1)

and P_c = 4 W + 8R -------------------------------------------(2)

Solving equation 1 and 2:

W = 2.67 pound

R = 0.67 pound

Hence it is shown that wages and rent are not 2 and 3 respectively.

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1 part of the question is complete.