Show all steps to get full credits. Question 1 (20%): We will now look at an economy in the long run under the Heckscher

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Show All Steps To Get Full Credits Question 1 20 We Will Now Look At An Economy In The Long Run Under The Heckscher 1 (121.76 KiB) Viewed 64 times

Show all steps to get full credits. Question 1 (20%): We will now look at an economy in the long run under the Heckscher-Ohlin framework. Suppose we have a small Home economy that produces two goods: cloth (C) and food 11 (F). The production functions for cloth is Qc LCK and the production function for food is QF = Given this information about production functions, marginal products of labor and capital in each sector can be shown to be: 1 1 1 1 2 MPLc = {4,2 KŻ and MPKc = UK MPLp = {4, KĀ and MPK: = UK 2 2 The endowment of the Home economy is 100 units of labor and 100 units of capital. a. Derive the relative factor demand for each sector? Based on these derived factor demand, which sector is labor-intensive and which sector is capital-intensive? b. Sketch out the relative factor demand curves for each sector derived above on the same graph. (Note: there is no need for your graph to be exactly to scale, just make sure you label and position the demand curves correctly.) c. Suppose now that the economy engages in (free) international trade with another country called Foreign. Foreign has identical technology and produces the same set of goods. The only difference now is that Foreign's endowments include 200 units of labor and 400 units of capital. Explain the patterns of trade between the two country? (who exports/imports what? which theorem you are invoking?) d. Suppose that there is a natural (external) shock that suddenly moves 100 units of capital from Foreign to Home country. What happens to the patterns of trade in a new world equilibrium?