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Relative Price Range for Cloth Production

This document outlines a problem set question for an international economics course involving the Heckscher-Ohlin model of trade. The problem asks the student to analyze a numerical example of an economy that produces both cloth and food without factor substitution, including determining production possibility frontiers and how changes in factor supplies and relative prices impact production levels and factor allocation between sectors.

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28 views2 pages

Relative Price Range for Cloth Production

This document outlines a problem set question for an international economics course involving the Heckscher-Ohlin model of trade. The problem asks the student to analyze a numerical example of an economy that produces both cloth and food without factor substitution, including determining production possibility frontiers and how changes in factor supplies and relative prices impact production levels and factor allocation between sectors.

Uploaded by

lolla
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

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Econ 5610: International Economics

Problem Set 2

I. Heckscher-Ohlin Model

1. Go back to the numerical example with no factor substitution


(aKC = 2, aLC = 2, aKF = 3, aLF = 1, L = 2, 000, K = 3, 000).

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 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?

1
d) Now assume 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? (Assume the economy is producing at a point such that all resources are
being utilized)

f) Describe how the allocation of machine-hours and work-hours between the cloth and
food sectors changes (before and after the increase in capital). Do those changes
conform with the changes described for the case with factor substitution? To find
the production levels before the increase in capital you may also assume that the
economy is producing at a point such that all resources are being utilized.

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