1. The economy of Pennsylvania can produce grapes and hardwood lumber (such as b
ID: 1192841 • Letter: 1
Question
1. The economy of Pennsylvania can produce grapes and hardwood lumber (such as black cherry, red maple, red oak, and sugar maple). You notice that the price of forest-land and logging machines are high, while the price of labor is low. Explain, using the Heckschler-Ohlin model, what causes the price differences. Which good, grapes or hardwood, do you predict Pennsylvania has the comparative advantage in? 2. When an economy is under autarky the price of eggplant is $5. The world price of eggplant is $3.50. If opened to the world market, would consumers or producers benefit? Would consumers or producers lose? Explain your reasoning (using a graph would be beneficial).
Explanation / Answer
The economy of Pennysylvania can produce two goods - grapes and hardwood
It has been provided that price of forest-land and logging machines are high while price of labor is low.
This information implies that the price of factor (labor) which is required in production of grapes is cheaper than price of factor (forest-land and logging macines) required in production of hardwood.
According to Heckschler-Ohlin model, difference between the price of two factors is due to the difference in quantity available of them with respect to a country.
So, price of labor is low while price of forest-land and logging machines is high because labor is more abundantly available in economy of Pennsylvania than forest-land and logging machines.
This model also states that a country has comparitive advantage in production of that commodity whose production is undertaken using abundant factor of production because in such case it can produce the stated commodity at lower opportunity cost.
Since, economy of Pennsylvania is labor-abundant, it will have comparitive advantage in production of grapes as their production is labor-intensive. Also, as price of labor with respect to other factors is low, opportunity cost of producing grapes for Pennsylvania will also be low in comparison to opportunity cost of producing hardwood.
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