Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:
Components: Total costs of production = PC • QC = 100
Earnings of high-skilled labor = WH • HC = 25
Earnings of low-skilled labor = WL • LC = 25
Earnings of capital = R • KC = 50
Share of total costs paid to high-skilled labor = 25/100 = 25%
Share of total costs paid to low-skilled labor = 25/100 = 25%
R&D: Total costs of R&D = PR • QR = 100
Earnings of high-skilled labor = WH • HR = 30
Earnings of low-skilled labor = WL • LR = 20
Earnings of capital = R • KR = 50
Share of total costs paid to high-skilled labor = 30/100 = 30%
Share of total costs paid to low-skilled labor = 20/100 = 20%
a. In which factor(s) is components intensive? In which factor(s) is research intensive?
b. Suppose that due to the opening of trade, the relative price of R&D increases, ∆PR/PR = 10%, whereas the price of components stays unchanged, ∆PC/PC = 0. Calculate the change in the relative wage of high-skilled and lowskilled labor.
c. What has happened to the relative wage of high-skilled/low-skilled labor? How does this result compare with Problem 4, and explain why it is similar or different.