Question

Suppose Elmira is a small country that produces two goods, grain and novels, with two factors of production, unskilled labor (L) and skilled labor (L). Both factors are completely mobile between the two sectors of production in the long run. In the medium run, skilled labo is specific to its sector. That is, it takes time to retrain and acquire new skills in order to move between the two sectors in the economy The production of grain is relatively intensive in unskilled labor; whereas, the writing of novels is relatively intensive in skilled labor. Elmira, with its fine institutions of learning, is relatively abundant in skilled labor A) If the country decides to engage in international trade, what product will it export? Which factor of production will gain and which will lose from trade in the medium run? Thoroughly explain your answers and illustrate the changes in production patterns in the medium run by using our specific-factors model and showing how the mobile factor is reallocated between the two sectors. B) How will your answers to part A) change when considering the impact of free trad on the economy over the long run? Provide a thorough explanation and illustrate the change in production patterns on a PPF diagram. C) There is political unrest in the neighboring country, Ithaca. As a consequence, Elmira experiences an inflow of unskilled labor. What will be the effects over the long run o this labor immigration on Elmira's output price ratio, factor price ratio and the L./L, ratios in both sectors. How will Elmira's overall welfare be affected? Please explain carefully and illustrate on a PPF diagram. D) How might your answers to part C) change if Elmira had been a large country? In this case, which group would wish to lobby the government to establish stricter defense of t country's borders? lalar Seahy and dlle! sk.led hr navels epart

Answer 1

Date : , the a 4 If 11 it will ex the country decides to engage in internation trade, u export novels, as producers of novel are specific to its sector redium run, skilled labour factor of production. u gain and unskilled Labour factor of production In medium run los will olanation :- Skilled labour force to is specific to in sector this means that it takes time to set rain and acquire new skills in order to move Lonween the two sectory in the economy and rance skilled labour factor of production will gain. How mobile factor is reallocated between the hoo sectors :- The production of grain is relatively intensive in unskilled labour. i) The writing of novels is relatively intensive in skilled labour. B) over the long run, unskilled labour factor of production will gain and skilled Labour factor of production will lose. Reason - In long run, both factors are completely mobile between the two sectors of production Skilled labour Scanne with B B CamScanne tuns lei too-taboon factor of production -

Date: C) Giner: Elmira experiences an inflow of unskilled ... Labor • Effects (long run) on output -price ratio :- i Output of grain will rise and therefore, - supply of grain will be more comparatively and hence, price will fall .. e) Output - price ratio of novel will rise ... r price ratio :- 1) Factor price ratio for production of grain will a) fuelos prise Gratis for production of covers will --Autre Effects on Ls/Lu ratio 2) Is the ratio for productio grain will sine fall. w Ls/he ratio for novels will rise - fade Overall welfare of Elmira :- i Skilled labour will have a better living conditions than the unskilled labour force. PPF diagrams x B D Cs Scanne with CamScanner Grain Coutput)

D) Group of unskilled labour force or the producers of area would wish to Lobby the government to establish stricter defense of the country's border to maintain the wage ratio and to improve their welfare Overall. Scanned with - CamScanner