2 HO Model [40 points] Consider an Heckscher-Ohlin model with two countries (the U.S. and France), two goods (computers (C) and wine (W)), and two factors of production (high skilled labor H and low skilled labor L). Suppose that computers and wine are produced in both countries with the following production function(s): ec(Lc, Hc) = (Lc)1/3(Hc)2/3 (1) Ow (Lw, HW) = (LW) 1/2( HW) 1/2 ( 2 ) Suppose that High-skilled labor is higher in the U.S. than in France, i.e. HUS > HFrance but that the two countries have the same amount of low-skilled workers, i.e. LUS = [France. Suppose also that high-skilled workers in the two countries are similar, that is, they are equally productive. 1. Using the information on the production function, find the marginal product of high and low-skilled labor in both sectors, i.e., find MPLc, MPHc, MPLw and MPHw. [Hint: since technology is the same in both countries, you only need to do this for one country] [5 points] We find: MPLC = MPLC = MPHc = MPH = MPLw = MPLW = MPHw = MPHW = 2. Suppose that both goods are produced in each country, and let pc and pw denote the price of com- puters and wine. Let we and ww denote the wage of High-skilled workers in the Computer and Wine sector, respectively. Similarly, let we and ww denote the wage of Low-skilled workers in the Computer and Wine sector, respectively. Find the equilibrium wa, wW, we and ww . [5 points] Factors are paid So:3. Using your answer in part 1. and 2., show that Wine is the low-skilled labor intensive sector, that is, show that: [7.5 points] LC / Hc 1 Lw/Hw _ E" If both goods are produced, then by factor price equalization we know that 4. Suppose that consumers in the two countries have the same homothetic preferences. Show graphi- cally the autarky equilibrium production and consumption point in the two countries. Which coun- try has a comparative advantage in Wine? and in Computers? If the countries open to trade, is the equilibrium trade price of computers to Wine higher or lower than the autarkic price in the U.S.? [15 points] Home Fonlgn (a) Because , it follows that has a comparative advantage in Wine and vice-versa, has a comparative advantage in Computers. (b) if the countries open to trade, the equilibrium trade price of computers will be than the autarkic price in the 1.1.5. 5. In the U.S., who is made better off by trade and who is made worse off? [Answer using graphs, equations, arguments, or a convex combination of the three] [7.5 points]