04 Jun WHAT IS THE RANGE FOR THE RELATIVE PRICE OF CLOTH SUCH THAT THE ECONOMY PRODUCES BOTH CLOTH AND FOOD?
What is the range for the relative price of cloth such that the economy produces
both cloth and food?
Question
RESOURCES AND TRADE: THE HECKSCHER-OHLIN MODEL 1. Go back to the numerical example with no factor substitution that leads to the production
possibility frontier in Figure 5-1.
a. What is the range for the relative price of cloth such that the economy produces
both cloth and food? Which good is produced if the relative price is outside of this
range?
For parts (b) through (f), assume that the price range is such that both goods are
produced.
b. Write down the unit cost of producing one yard of cloth and one calorie of food as
a function of the price of one machine-hour, r, and one work-hour, w. In a competitive
market, those costs will be equal to the prices of cloth and food. Solve for the
factor prices r and w.
c. What happens to those factor prices when the price of cloth rises? Who gains and
who loses from this change in the price of cloth? Why? Do those changes conform
to the changes described for the case with factor substitution?
d. Now assume that the economy’s supply of machine-hours increases from 3,000 to
4,000. Derive the new production possibility frontier.
e. How much cloth and food will the economy produce after this increase in its
capital supply? f. Describe how the allocation of machine-hours and work-hours between the cloth
and food sectors changes. Do those changes conform with the changes described
for the case with factor substitution?
2. In the United States, where land is cheap, the ratio of land to labor used in cattle
raising is higher than that of land used in wheat growing. But in more crowded
countries, where land is expensive and labor is cheap, it is common to raise cows
by using less land and more labor than Americans use to grow wheat. Can we still
say that raising cattle is land-intensive compared with farming wheat? Why or
why not?
3. In the discussion of empirical results on the Heckscher-Ohlin model, we noted
that recent work suggests that the efficiency of factors of production seems to differ
internationally. Explain how this would affect the concept of fact
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