Answer Happy

(25pt) Specific Factor Model. Consider the Specific Factor Model developed in class, where Cloth (C) is made with capital (K) and Labor (L), while Food (F) is made with Land (T) and Labor (L), under perfect competition and constant returns to scale. Goods' prices are determined on world markets and therefore taken as given by all in this small open economy. Labor is mobile, free to move between the two sectors, but the other two factors are "specific" to their sector and useless in the production of the other good You are asked to study the consequences of an increase in the price of Food, on world markets, with no change in the price of Cloth. a) (10pt) Use a diagram to illustrate the consequences of this shock for the wage received by workers and the allocation of Labor across sectors. Label curves, axes, and key coordinates. b) (15pt) Use diagrams and/or equations to show the consequences of this shock for the welfare of the factors of production in this economy.