Question

can someone answer question 2 please??? 1. In class, we developed a PPF for an economy that produced two goods with no factor substitution. This PPF gives some intuition for why the PPF in the Heckscher-Ohlin Model is curved. a. Imagine an economy makes only clothes (QC) and food (QF) and has two inputs of production: Labor (L) and Capital (K). It takes 4 units of capital and 1 unit of labor to make one unit of clothing. It takes 1 unit of capital and 1 unit of labor to make one unit of food. There is no substitutability between the two inputs. Which industry is labor intensive and which is capital intensive? Show how you know. b. Draw the PPF for this country if it has 4,000 units of capital and 2,000 units of labor. Be sure to separately identify the labor constraint, the capital constraint and the country’s actual PPF. c. Identify on which segment of the PFF the following is true: i. The country is using all of its L, with some K leftover. ii. The country is using all of its K, with some L leftover. iii. The county is using all of its K and L. d. If we weaken the assumption of no substitutability, the PPF will go from being “kinked” to being curved. Explain why it is curved and why this is different from the reason the PPF was curved in the Specific-Factors Model. 2. Using the same information from the previous problem, answer the following questions. A hint from Econ 104A: the total cost of production, TC, is equal to the wL+rK. You can think of L and K in this context as the number of units of Labor or Capital that it takes to make one unit of the good. a. Write down the unit cost of production for one unit of clothing and one unit of food as a function of the wage (w) and rental rate (R). In a competitive market, those costs will be equal to the prices of clothing (PC) and food (PF), so write equations that set the price of the good equal to the cost of producing it. b. Use the two equations in part (a) to solve for equations for w and R in terms of PC and PF(hint: you have two equations and two unknowns. This will take some algebra). c. Before trade, the no-trade prices are Pc=$35 and PF=$20. Calculate w and R. d. When trade opens, Home exports QC and the world prices are Pc=$39 and PF=$15. Calculate w and R again under the world prices. Compare them to what you found in part (c). How is this consistent with the Heckscher- Ohlin Model?

Answer 1

Given Information,

Two Factors of production- Labor and Capital

Two Goods- Cloths and Food

Unit labor requirements of each good-

	Cloth	Food
Labor	1	1
Capital	4	1

Factor Endowment-

Total Capital with the economy = 4000

Total Labor with the economy = 2000

Answer 2 : The total cost of production is given by wL + rK

a) Using the unit labor requirements given in table above,

The unit cost of production for one unit of clothing is given by wL + 4r

The unit cost of production for one unit of food is given by w + r

Under competition, Unit costs = Price

Thus, w+ 4r = P_C ............... (i)

and w + r = P_F .................. (ii)

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b) solving (i) and (ii)

from (i)

4r =  P_C-w

or r = (P_C-w)/4 ........... (iii)

from (ii)

r = P_F - w ............... (iv)

equating (iii) and (iv)

P_C-w = 4P_F - 4w

3w = 4P_F - P_C

_{w = (}4P_F - P_C) / 3 ................ (v)

substituting (v) in (i)

(4P_F - P_C) / 3 +4r =  P_C

4P_F - P_C + 12 r = 3 P_C

4 P_F - 4 P_C = -12r

P_C - P_F = 3r

r = (P_C - P_F )/3 ............. (vi)

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c. Before trade, P_C = $ 35 and P_F = $ 20

substituting the values in (i) and (ii) respectively,

w + 4r = 35

w + r = 20

solving the two gives

20 - r + 4r = 35

3r = 35 - 20

3r = 15

r = 5

and w + 5 = 20

w = 15

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d) After trade, P_C = $ 39 and P_F = $ 15

substituting the values in (i) and (ii) respectively,

w + 4r = 39

w + r = 15

solving the two gives

15 - r + 4r = 39

15 + 3r = 39

3r = 24

r = 8

and w +8 = 15

w = 7

	Wages	Rent
Before Trade	15	5
After Trade	7	8

According to H-O model, the country exports the product that uses the abundant factor intensively in its production. The country is capital abundant and thus exports capital intensive commodity- cloth. Thus this satisfies HO model.

Stolper Samuleson Theorem- If the relative price of commodity increases, there is a corresponding increase in the price of factor used intensively to produce the good, and the price of other factor falls . Since, the price of cloth per unit increased from $35 to $39, and cloth being capital intensive, the price of capital, r increases from $5 to $8 per unit after trade and that of labor, w falls from $15 to $7 per unit.  

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