Answer Happy

2. From the lecture notes, we learned that as long as prices remain unchanged, changes in factor endowments are related to changes in output of industries according to the following equations: AQC • + akc Qc AK K AL L = aKF = αLF AQF QF AQF QF (You are not supposed to show the derivation of the two above equations. Start your analysis by having them as given.) AQC Qc ·+ αLC' KF K Where αKF, akc, αLF, LC are the share of capital and labor used in the production of food and cloth. That is, αKF = and, ,αKC, αLF, αLC can be defined similarly. The resource constrains in the economy are Kp + Kc = K and Lp + Lc = L, where K and L are total supply of capital and labor. QF and Qc are respectively output of food and cloth, KF is the amount of capital used if food production, Kc is the amount of capital in cloth production, and so on. ΔΚ K Suppose that food production is capital-intensive, that is aKF > akc, and that cloth production is labor intensive αLF <aLc. Suppose that the supply of capital increases more than that of labor: Prove that the following chain of inequality holds: AL L AK AL AQE > 4* >4 > AQ ΔQF QF K Qc Note: The result you are supposed to prove in this question, is called the Rybczinsky theorem.