Question: 3. (25 marks) Consider the Hecksher-Ohlin model with two industries, X and Y; and two inputs, K and L. Assume that economy is small and

3. (25 marks) Consider the Hecksher-Ohlin model with two industries, X and Y; and two inputs, K and L. Assume that economy is small and open, so that goods prices are fixed at px and py. Assume that X is capital intensive. The initial unit cost function for industry Y is c (w,r), while that for industry X is c(w.r). Suppose technological changes occurs in the X industry which reduces unit costs in that industry by a factor a. That is, let c (w,r) be the new cost function in the X industry, where c (w,r) = ac*(w,r) 0

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