Q.1 a. If there is a rise in relative price of cloth, how can both industries reduce relative use of L to K while employing their entire endowment of resources?
Why is this the case?
b. Articulate possible transfer of K and L between industries using Equation (5A-1) from the book. Discuss each movement's e ect on price of the factor moving between industries. Do we have any reason to believe a particular transfer will increase or decrease factor costs more or less than any others? What, if anything, does this say about aggregate movements in market pricing of capital and labor?
Q.2 (from Midterm Fall 2008) For this problem, consider the Heckscher-Ohlin model from our textbook. Let the two goods being produced be cloth, C, and food, F, and let the two factors of production be land, T, for `terra', and labor, L. Let the relationship between relative price of cloth, PC=PF , for PC and PF equal to the price of cloth and food respectively, and the wage-rental ratio, w=r, for w and r equal to the cost of a unit of labor and land respectively, be given by: (PC=PF )2 = w=r. Furthermore, let the relationship between w=r
and the land-labor ratio used in the production of cloth, TC=LC, be given by w=r = 2(TC=LC) and let the relationship between w=r and the land-labor ratio used in the production of food, TF =LF , be given by w=r = (3=2)(TF =LF ) 2.
a. If the relative price of cloth increases from 1 to 2, by how much does the land-labor ratio used in the production of cloth and food increase? Use a graph to illustrate this change, numerically indicating the changes.
b. If the total labor supply in a particular country equals 100 hours and the total land supply equals 240 acres, how much land and labor is used in the production of each good after the increase in the relative price? Illustrate this with a correspondent graph.
Q.3 Suppose that at current factor prices cloth is produced using 40 hours of labor for each acre of land, and food is produced using only 8 hours of labor per acre of land.
a. Suppose that the economy's total resources are 320 hours of labor and 20 acres of land. Use a diagram and some algebra to determine the allocation of resources. (It doesn't necessarily have to be to scale.)
b. Say there is a bumper crops in births for some astrological reason, and the labor force increases 10% from 320 hours to 352 hours. Amend the diagram and use similar algebra to gure out what happens again.
Q4. (from Midterm Spring 2011) a. Describe Chang's distinction between the `historical induction' approach versus the `deduction' approach to economic science. Which does he prefer and why? What does Chang have to say about how di erences in these modes of analysis enables him to come to di erent conclusions than those present in microeconomics and our Krugman and Obstfeld text?
b. To what extent does Chang claim there is a coherent strategy to employ regarding development, as it applies to the `now developed countries' as well as Japan, Taiwan, and Korea? Why do these historical policy sets constitute `coherent or incoherent strategies'? Explain in as much detail as possible what this strategy is, or if there is no such strategy, what one would have to do to substantiate the existence of such a strategy. Be sure to explicitly include as many pertinent policies as possible and their relationship (or the type of
relationship that would need to be demonstrated) in your account.