Suppose that a country has two sectors, food and clothing. Labor is mobile between sectors, but capital...
Suppose that a country has two sectors, food and clothing. Labor is mobile between sectors, but capital and land are not. Capital is “specific” (i.e., only used) to make clothing. Land is specific to make food. If trade liberalization would result in the country exporting food, would the capital holders prefer autarky or free trade? Why?
Homework Answers
They will prefer autarky and not free trade because when the free trade stars the demand for food will increase, the nation not just have to fulfil the local demand but also the increased demand in the market this will increase the demand for land and labor in land and increase the return for these factors and the nation will import capital intensive goods i.e. cloths.
This will reduce the return of the capital intensive goods in the market. They will protest and prefer autarky.
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Suppose that a country has two sectors, food and
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Problem 1
A country (”Home”) is populated with 300 workers who produce
either food (F) and/or clothing (C). Each food worker produces 6
units of food and each clothing worker produces 3 units of
clothing. The preferences of the consumers over food and clothing
are represented by the utility function: u(DF ,
DC) = (DF ) 2/3 (DC)
1/3
1) Assuming that at the optimum, consumers set their marginal
rate of substitution, MRSDF ,DC , to the relative price,
i.e.,...
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Problem 1
A country (”Home”) is populated with 300 workers who produce
either food (F) and/or clothing (C). Each food worker produces 6
units of food and each clothing worker produces 3 units of
clothing. The preferences of the consumers over food and clothing
are represented by the utility function: u(DF ,
DC) = (DF ) 2/3 (DC)
1/3
1) Assuming that at the optimum, consumers set their marginal
rate of substitution, MRSDF ,DC , to the relative price,
i.e.,...
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