Question

Problem 1

Suppose an economy (Home) produces only two goods- Magnets and Neckties. Both goods require both capital and labour to produce. Assume capital and labour cannot be substituted for one another in the production process. The economy has 600 units of capital and 800 units of labour available. It takes 4 units of labour and 2 units of capital to make each Magnet and 2 units of labour and 6 units of capital to make each Necktie

Go back to the specification in Question 1: Question 1 information above

Problem 3 need answer

now suppose that labour and capital are perfectly substitutable. Suppose that a Foreign country has identical unit-labour and unit-capital requirements to Home, but Foreign has more total labour and less total capital to work with.

a) Graph each country’s PPF, on the same graph, with QM on the x-axis and QN on the y-axis

b) Graph the relative supply of each country, on the same graph, with the relative price of Magnets ( PM/PN ) on the y-axis, and the relative quantity of Magnets ( QM/QN ) on the x-axis If the two countries then open up to trade (with each other):

c) What happens to the relative price of Magnets in the Home country?

d) What is the pattern of trade (who exports what to whom)?

e) What might we expect to happen to the wage rate relative to the cost of capital ( w/r ) in the Home country after opening up to trade?

f) How does opening up to trade affect the incomes of labour- and capital-owners in the Home country?

problem 3 needs an answer, the problem 1 is just there for the information needed to solve problem 3

Answer 1

C) THE RELATIVE PRICE OF MAGNETS IN THE HOME COUNTRY WILL DECREASE AS THE FOREIGN COUNTRY EXPORTS MORE OF MAGNETS .

D) SINCE MAGNETS REQUIRE MORE LABOUR TO BE PRODUCED AND FOREIGN COUNTRY HAS MORE LABOUR THAN HOME COUNTRY IY WILL EXPORT MAGNETS AND HOME COUNTRY WILL EXPORT NECK TIES