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2. Consider an offshoring model just like that shown in Figure 7-1 in the book, in which the relative wage of low-skilled labor to high-skilled labor is lower in Foreign than in Home and the costs of capital and trade are uniform across production activities. 2. Suppose that Home uniformly increases the tariff level it applies to imports of all goods and services from Foreign. How does this affect the slicing of the value chain? b. Draw relative labor supply and demand diagrams for Home and Foreign showing the effect of this change. What happens to the relative wage in each country? c. Suppose instead that the Home country requires that low-skilled labor in Foreign be paid a minimum wage that is higher than its current wage (but still less than what low-skilled labor eams at Home). How does this affect the slicing of the value chain, and what happens to the relative demand for skilled labor in each country? d. Continuing from part (c), suppose that the minimum wage for low-skilled labor in Foreign is high enough that the relative wage of low-skilled/high-skilled labor in Foreign exceeds that in Home. Under these circumstances, what goods on the value chain will Home choose to offshore to Foreign 1 A Model of Offshoring Value Chain of Activities FIGURE 7-1 (1 of 2) The Value Chain of a Product (a) Activities Ranked by Order in Production Start Finish R&D Component production Assembly Marketing and sales Any product has many different activities involved in its manufacture. Panel (a) lists some of these activities for a given product in the order in which they occur. Value Chain of Activities FIGURE 7-1 (2 of 2) The Value Chain of a Product (continued) (b) Activities Ranked by High-skilled/Low-skilled Labor Done in Foreign Done at Home Low-skilled High-skilled Assembly R&D Component production Marketing and sales The value chain in (b) lists these same activities in order of the amount of high- skilled/low-skilled labor used in each. In panel (b), the assembly activity, on the left, uses the least skilled labor, and R&D, on the right, uses the most skilled labor. Because we assume that the relative wage of skilled labor is higher at Home and that trade and capital costs are uniform across activities, there is a point on the value chain, shown by line A, below which all activities are offshored to Foreign and above which all activities are performed at Home. mation T