Please review the following information and answer questions bellow based on the

Question

Please review the following information and answer questions bellow based on the information provided. Thank you.

1. The slope of a country's production possibility frontier with cloth measured on the horizontal and food measured on the vertical axis in the specific factors model is equal to (-MPLF/MPLC ; -MPLC/MPLF) and it (becomes steeper; is constant; becomes flatter) as more cloth is produced.

2. In the specific factor model, the effect of an increase in the productivity of labor in the production of food will cause a(an) (decrease; increase; no change) in the quantity of labor used to produce cloth, a(an) (decrease; increase; no change) in the quantity of labor used to produce food and a(an) (decrease; increase; no change) in the wage rate.

3. Assume that output of good Y is measured on the vertical axis, output of good X is measured on the horizontal axis, MPL is the marginal product of labor with a subscript indicating which good, P is the price of a good, and w is the wage rate.

a. What is the slope of a country’s production possibility frontier equal to?

b. The optimal production point is located where the slope is equal to ________.

4. In the specific factors model, a 0% increase in the price of food accompanied by a 5% increase in the price of cloth will cause wages to (increase by less than 5%; increase by 5%; increase by more than 5%; remain constant), the production of cloth to (increase; remain unchanged; decrease), and the production of food to (increase; remain unchanged; decrease).

5. In the specific factors model, a 5% increase in the price of food accompanied by a 1% increase in the price of cloth will cause (an ambiguous change; an increase; a decrease) in the welfare of labor, (an ambiguous change; an increase; a decrease) in the welfare of the fixed factor in the production of food, and (an ambiguous change; an increase; a decrease) in the welfare of the fixed factor in the production of cloth.

7. Suppose Australia is a capital (K)-abundant country, and Sri-Lanka is a labor (L)-abundant country. Both produce labor and capital intensive goods with the same technology. The production of food is capital intensive, and that of cloth is labor intensive. Use Heckscher-Ohlin model to answer the following questions:

a. Which of the two countries has a higher relative wage, w/r, before trade?

b. Which product is the labor intensive, and which is the capital intensive one?

c. What happens to the relative price of cloth in Australia as a result of trade? Does it increase or decrease?

d. Which country will export cloth as a result of trade?

e. What happens to the relative income of workers in Australia as a result of trade? Does it increase or decrease?

f. Would land owners in Australia lobby for or against free trade?

g. Would land owners in Australia lobby for or against free admittance of immigrant workers?

Explanation / Answer

1. Slope = -MPLF/MPLC which shows that to gain 1 unit of cloth, producer has to sacrifice how much units of food.

2. increase; decrease; increase

Increase in the productivity of labor leads to increase in the demand of labor because country can produce more units of cloth with the same units as before. Now, country can have comparative advantage in the production of cloth so demand of labor for the production of cloth increases and labor for the production of food decreases. As a result, wage rate increases because demand of labor increases.

3. a) Slope of PPF = - Loss in Good Y / Gain in Good X means how much Good Y has to sacrifice to increase the production of Good X.

b) Slope = - Px/Py

4. a) increase by less than 5%

b) increase because of increase in the price of cloth, producers are willing to supply more units.

c) decrease as price of food does not increase so producer will substitute its production in favor of cloth and as a result, production of food decreases.

5. a) an ambiguous change

b) an increase

c) a decrease

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