Consider a simple Heckscher-Ohlin model in which the production functions are the following: 1/2 1/2 1/3....

 

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Consider a simple Heckscher-Ohlin model in which the production functions are the following: 1/2 1/2 1/3. Y₁ = ¹1 While the representative consumer's preferences are given by the following Cobb- Douglas utility function: UL20/0399 Page 3 of 5 U = C₁ C₂. (f) Derive the unit-cost functions for each industry, c;(w,r) with i=1,2, and the amount of factors (labour and capital) used to produce one unit of each product, ai aik Which industry is labour intensive and which one is capital intensive? [5 marks] (g) Explain the conditions that determine the equilibrium in the closed economy (no trade), find the relative wage, w/r, and the relative price in the equilibrium. [8 marks] (h) Assume now that trade is allowed between two countries (named H and F). H's endowment is L units of labor and K units of capital, while F's endowment is L* and K*. These endowments are such that L=L*and K>K*. Furthermore, assume that the factor endowments in the two countries imply that the factor price equalisation holds. Find the relative wage, w/r, in the free trade equilibrium. [4 3 Consider a simple Heckscher-Ohlin model in which the production functions are the following: 1/2 1/2 1/3. Y₁ = ¹1 While the representative consumer's preferences are given by the following Cobb- Douglas utility function: UL20/0399 Page 3 of 5 U = C₁ C₂. (f) Derive the unit-cost functions for each industry, c;(w,r) with i=1,2, and the amount of factors (labour and capital) used to produce one unit of each product, ai aik Which industry is labour intensive and which one is capital intensive? [5 marks] (g) Explain the conditions that determine the equilibrium in the closed economy (no trade), find the relative wage, w/r, and the relative price in the equilibrium. [8 marks] (h) Assume now that trade is allowed between two countries (named H and F). H's endowment is L units of labor and K units of capital, while F's endowment is L* and K*. These endowments are such that L=L*and K>K*. Furthermore, assume that the factor endowments in the two countries imply that the factor price equalisation holds. Find the relative wage, w/r, in the free trade equilibrium. [4 3

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f To derive the unitcost functions for each industry we need to find the costminimizing input combinations for producing one unit of each product In a competitive market the costminimizing input combi... View the full answer