Heckscher Ohlin Model

1. (40 marks} In the HeckscherOhlinSamuelson Model, two goods [1 and 2} are produced using two factors of production {L and K]. The outputs of the two goods are 371 and 322. The prices of the two goods are given by 3.11 and p2. The factor prices for L and Kare given by w and r respectively. The cost functions for these two goods are given by: | H 4;. will clfw. r] = w r and MN NH c2(w,r) = w 1\" Let the prices of the two goods be p1 = 4- and p2 = 1. Answer all the following questions rounding your answer to two decimal places where necessary. Please show all working. i. Choose an endowment of labour and capital that yields a competitive equilibrium in which both goods 1 2 are produced (NB: there are many possible such endowments just choose one]. Using the endowment of L and K that you have chosen, calculate the competitive equilibrium factor prices [w and r] as well as the outputs yl and 312 {14 marks) ii. Choose an endowment of labour and capital that yields a competitive equilibrium in which only good 1 is produced (NB: there are many possible such endowments just choose one]. Using the endowment of L and K that you have chosen, calculate the competitive equilibrium factor prices [w and r}, the output yl. {10 marks] iii. Illustrate your answers to parts {i} and {ii} on a diagram with capital {K} measured along the vertical axis and labour [L] measured along the horizontal axis. Label this diagram with as much detail as you can given the information provided in the question. (5 marks} iv. Illustrate your answers to parts {i} and {ii} on a diagram with the interest rate [r] measured along the vertical axis and the wage {w} measured along the horizontal axis. Label this diagram with as much detail as you can given the information provided in the question. (5 marks} v. Discuss how your answers to parts [i] and [ii] relate to the Rybczynski Theorem. {3 marks) vi. Discuss how your answers to parts [i] and [ii] relate to the Factor Price Equalisation Theorem. {3 marks)