International Economics HW 6 NYU, Spring 2012, Instructor: Tai Young-Taft Q.1 Consider the setup from Ch. 5 in our book. a. If there is a rise in relative price of cloth, how can both industries reduce relative use of L to K while employing their entire endowment of resources? Why is this the case? b. Articulate possible transfer of K and L between industries using Equa- tion (5A-1) from the book. Discuss each movement's eect on price of the factor moving between industries. Do we have any reason to believe a particular trans- fer will increase or decrease factor costs more or less than any others? What, if anything, does this say about aggregate movements in market pricing of capital and labor? Q.2 (from Midterm Fall 2008) For this problem, consider the Heckscher-Ohlin model from our textbook. Let the two goods being produced be cloth, C, and food, F, and let the two factors of production be land, T, for `terra', and la- bor, L. Let the relationship between relative price of cloth, PC=PF , for PC and PF equal to the price of cloth and food respectively, and the wage-rental ratio, w=r, for w and r equal to the cost of a unit of labor and land respectively, be given by: (PC=PF )2 = w=r. Furthermore, let the relationship between w=r and the land-labor ratio used in the production of cloth, TC=LC, be given by w=r = 2(TC=LC) and let the relationship between w=r and the land-labor ratio used in the production of food, TF =LF , be given by w=r = (3=2)(TF =LF ) ?? 2. a. If the relative price of cloth increases from 1 to 2, by how much does the land-labor ratio used in the production of cloth and food increase? Use a graph to illustrate this change, numerically indicating the changes. b. If the total labor supply in a particular country equals 100 hours and the total land supply equals 240 acres, how much land and labor is used in the production of each good after the increase in the relative price? Illustrate this with a correspondent graph. Q.3 Suppose that at current...
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