30 Apr This exercise analyses the effects of immigration in a Heckscher– Ohlin model. The island of Kauai in the Pacific Ocean produces two goods using skilled and unskilled labor. Naturally, Kauai can be considered a small economy and a wise government has led to complete trade liberalisation. (a) In the initial situation in which trade in final goods is free, Kauai produces both goods. The technology is characterized by the absence of factor intensity reversals. How can you determine the factor prices prevailing in the country? (b) The country has now received a limited inflow of unskilled immigrants. The island of Kauai continues to produce both goods in the free trade equilibrium. What are the effects of immigration on the return to domestic workers? (c) Assume now instead that the immigration flows are substantial, so that Kauai ends up specializing in the production of the goods that is intensive in the use of unskilled labor. What are the effects on domestic worker’s income?
Suppose that student parking spaces on a college campus are scarce – that there are more demanders than suppliers. The college has to decide how to figure out which students should get the limited spaces. So a committee is formed, and member A suggests that an email should go out to all students letting them know that spaces will be given out on a first come basis starting at 8am Monday. So those who want a space can get there early and get one, and those that arrive too late are left out of the market. Member B proposes that the spaces be distributed by class rank: seniors get first dibs, then juniors, and so on. Member C suggests that spaces be given out based on cumulative GPA – highest gets the first space and so on. Member D suggests an auction, where the highest bidders get the spaces, and that the revenue from the auction be used to maintain the spaces. Which member would you support? Why? Remember, this is an economics class!
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