Although our discussion of the Heckscher-Ohlin model has assumed a fair degree of substitutability between capital and
Question:
Although our discussion of the Heckscher-Ohlin model has assumed a fair degree of substitutability between capital and labor, this is not necessary. Suppose that there is only one technique that can be used in clothes production: to produce a unit of clothing requires four man-hours of labor and one unit of capital. Similarly, in food production each unit requires a single man-hours of labor and a single unit of capital.
Explain which factor is used intensively in the production of which good. Illustrate your answer with isoquants for one unit of each good (with L on the x-axis and K on the y-axis).
At an initial equilibrium suppose the wage and rental rate of capital each have a value of $2/unit. If both goods are produced, what must be the relative price of clothing? Illustrate your answer with a well-labeled graph showing FF and CC isoquants.
What happens to the distribution of income if the relative price of clothing increases (assume again that both goods are produced)? Illustrate your answer graphically using the two-graph setup from class with the Stolper-Samuelson line on the left graph and the relative factor demand curves on the right graph.
Expert Answer:
Figure 1 Figure 2 In the above figure 1 unit 1 isoquants give amounts of capital and labor needed to ... View the full answer
