Suppose that a small open economy produces Good X and Good Y using skilled and unskilled labor. Each unit of Good X requires 1 unit of skilled labor and 4 units of unskilled labor, of which 1 unit of unskilled labor is used for each of 4 tasks. Each unit of Good Y requires 2 units of skilled labor and 4 units of unskilled labor, of which 1 unit of unskilled labor is used for each of 4 tasks. Initially, all of these unskilled-labor tasks were performed domestically, but now for both good X and good Y it becomes possible for one of these tasks to be performed in another country, where labor is so much cheaper that to a good approximation we can treat that task as being done for free. The price of both Good X is fixed on world markets as $24, and the price of Good Y is fixed on world markets at $36.
(a) Find the skilled and unskilled wages before offshoring occurs. Draw the zero-profit diagram that shows these wages as the equilibrium.
(b) Find the skilled and unskilled wages with offshoring. Show how the zero-profit diagram changes, adding the shifted curves to the diagram you just drew.
(c) Who gains from offshoring in this example? Explain why.