Problem
Consider an economy with two industries and three factors - unskilled labor (L), skilled labor (H) and capital (K).
(a) Suppose that industry one has a higher cost share of unskilled labor and also of capital (think of factory production). Suppose further than the product prices are constant, but that the rental on capital goes up (perhaps because capital is leaving the country). In this case, can we definitely predict what happens to the relative wage of unskilled labor?
(b) Now add a non-traded good, which uses only skilled and unskilled labor. What is the impact of the increase in the rental on capital, and the change in wages, on the price of the non-traded good. Contrast a high-skill-intensive versus low-skill-intensive non traded good.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.