small economy producing two goods, clothing and food. The clothing industry uses
capital (K) and labor (LC) as inputs, while the food industry uses
land (La) and labor (LF
) as factors of production.
The production technologies for the two industries are given by:
; QF =
country is endowed with 216 units of capital, 1822 units of
labor, and 9
units of land. Finally, the utility function of the representative
given by U(CC;CF )
= Cc1/2 CF1/2
the autarky production (= consumption) for the two industries.
2. Derive the
autarky price ratio ( [img width="13" height="22" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image001.png">A,
and the real value of production(i.e.
real GDP) in autarky.
the autarky utility level.
4. Determine LC and LF in
the real wage rate ([img width="21" height="21" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image002.png">[img width="21" height="21" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image003.png">real
return on land ([img width="21" height="23" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image004.png">
real total factor income in autarky. Is it equal to the real value of
production that you calculated previously?
7. Now, assume
that the country is allowed to trade with the rest of the
world at the
free trade price ratio, ([img width="18" height="22" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image005.png">equal to 0:1244.
the pattern of trade for the home country. Briefly explain the possible causes
for the HC’s comparative advantage.
9. Determine LC and LF in
QC and QF in
the real wage rate, the real interest rate, and the real return on land in free
12. Who are
the home country’s winners and losers of the move from autarky to trade?
real total factor income in free trade.
free trade consumption of food and clothing.
exports and imports.
the level of utility with free trade. Is the country better off due to