Question 2

Question 2. (10 points): This question is based on Specific Factor Model. Label all the point on your graphs. Suppose a country, Dryland, uses a mobile factor Labor (L) and two specific factors Capital (K) and Land (N) to produce two goods, computer (C) and Bread (B). Capital is specific to production of computer whereas Land is specific to production of Bread. A. B. Show Dryland's notrade equilibrium. Clearly state the equilibrium condition. Now, suppose price of computer in Dryland is lower than the price of computer in rest of the world. Is this an incentive for Dryland to export or to import computers? Show Dryland's trade equilibrium (production and consumption of computer after trade). Now, suppose Portland has 1000 workers (L), 400 units of capital (K) and 10,000 (N) units of land, and the production technology in computer and bread industries is QC = tch'J-5 k'15 and (13 = ZOLBD-S N05. Calculate the wage rate paid to labor in Dryland if price of computer is (Pc) =$150 and price of bread (Pa) = $10. Now suppose, due to technological advancement the price of computer in Dryland falls to $100. Calculate new labour allocation across sectors and new wage. Determine the gain/loss to factors of productions. (hint: compare real returns before and after price change. No need to calculate real return to capital and land. Just compare the price change and the expected change (increase or decrease) in marginal product of these two factors due to labor reallocation to figure out the change in real returns)