Econ 320 homework fall 2016 assume that the initial size of

Question

Answer all the questions:

Q1. Assume that the home (H) and foreign (F) countries produce two goods apples (A) and bananas (B) by using labor. The unit labor requirements in A and B are given in two countries as follows:

               A             B

H             2              3

F              3              1

a) Find out the opportunity cost of each good in each country.

b) Determine the pattern of specialization and trade between the two countries.

c) Given the total labor endowments of 1200 and 900 for H and F respectively, construct the world relative supply of A per unit of B.

d) Let the world relative demand for A per unit of B be given by the following equation:

P_A/P_B = D_B/D_A.

Derive the world relative demand curve and find out the equilibrium relative price of A in units of B.

Q2. Consider a specific factor model of 2 goods -cloth (C) and food (F), three factors - capital (K) that is specific to C, land (T) specific to F and mobile factor labor L. In such a model, examine the effect of a rise in the relative price of C on the distribution of income in the economy.

Q3. a) State and prove the Heckscher-Ohlin Theorem.

b) Critically examine the Leontief Paradox.

c) State and prove the factor price equalization theorem.

Q4. Let the representative firm in the auto industry have the following cost data:

Fixed cost (F) = $5,000,000,000

Average variable cost = $17,000 per automobile.

The profit maximizing market price (P) and number of firms (n) relationship is given by: P = 17,000 + (150/n).

Assume that the initial size of the auto market (Q) is 300,000,000 in the U. S. A. and 533,000,000 in Europe.

a) Calculate the equilibrium number of firms in the U. S. and European market under no trade between the two regions.

b) What is the equilibrium price of the automobile price in the U. S. A. and Europe if auto industry is closed to foreign trade?

c) Now suppose the auto markets in U. S. A. and Europe are integrated leading to an aggregate market size of 300,000,000+533,000,000,000 = 833,000,000,000 consumers. How many automobile firms will there be in the integrated market? What will be the new equilibrium price of an automobile in such a market?

d) Describe the gains to the consumers in the U. S. A. and Europe that result from this market integration.