Suppose that Home has two industries of comparable size: the wheat industry (w) and the custom...

 

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Suppose that Home has two industries of comparable size: the wheat industry (w) and the custom leather bag industry (b). Consider the following data on those industries: Wheat: Bags: Sales revenue = PQw = 100 Payments to labor = WLW = 20 Payments to capital = RK₁ = 80 Sales revenue = PbQb = 100 Payments to labor = WL₁ = 70 Payments to capital = RK₁ = 30 a) Assuming the context the HO model, why are the wage and rental rates in the Wheat industry given as W and R, instead of Wand Ru? b) Now suppose that a tariff on imported leather bags into Home was lifted, and the price of leather bags in home, Po, falls by 10%. Calculate the percentage changes in the rental rate of capital and the wage rate that prevail in Home after the price of bags falls, and show your work. Hint 1: use the equations provided in the example on pages 117-118 of the text: AR R = (PP) (R2) - (W) (K) R and - (W) ( ) (WLW) RKW Hint 2: set the right-hand side of the bottom equation equal to the right-hand side of the top equation. Plug in all of the known numbers and solve for W. Then plug that into the bottom equation to solve for c) How does the magnitude of the change in the rental rate of capital compare with the magnitude of the change in the wage? d) How does the magnitude of the change in the wage compare with the magnitude of the change in the price of bags? Comment. e) Which factor gains from the removal of the tariff, and which factor loses? Is this consistent with the Stolper-Samuelson theorem? Suppose that Home has two industries of comparable size: the wheat industry (w) and the custom leather bag industry (b). Consider the following data on those industries: Wheat: Bags: Sales revenue = PQw = 100 Payments to labor = WLW = 20 Payments to capital = RK₁ = 80 Sales revenue = PbQb = 100 Payments to labor = WL₁ = 70 Payments to capital = RK₁ = 30 a) Assuming the context the HO model, why are the wage and rental rates in the Wheat industry given as W and R, instead of Wand Ru? b) Now suppose that a tariff on imported leather bags into Home was lifted, and the price of leather bags in home, Po, falls by 10%. Calculate the percentage changes in the rental rate of capital and the wage rate that prevail in Home after the price of bags falls, and show your work. Hint 1: use the equations provided in the example on pages 117-118 of the text: AR R = (PP) (R2) - (W) (K) R and - (W) ( ) (WLW) RKW Hint 2: set the right-hand side of the bottom equation equal to the right-hand side of the top equation. Plug in all of the known numbers and solve for W. Then plug that into the bottom equation to solve for c) How does the magnitude of the change in the rental rate of capital compare with the magnitude of the change in the wage? d) How does the magnitude of the change in the wage compare with the magnitude of the change in the price of bags? Comment. e) Which factor gains from the removal of the tariff, and which factor loses? Is this consistent with the Stolper-Samuelson theorem?