R&D 2. Consider an outsourcing model in which the labor hours of four activities in the United States and Mexico are as follows: Hours of Labor Used in Each Activity (Per Unit of Output) Assembly Production Services Component Office Unskilled labor Mexico: 20 Mexico: 12 Mexico: 8 Mexico: 4 U.S.: 5 U.S.: 3 U.S.: 2 U.S.: 1 Skilled labor Mexico: 4 Mexico: 4 Mexico: 8 Mexico: 40 U.S.: 1 U.S.: 1 U.S.: 2 U.S.: 10 Skilled/unskilled ratio 1/5 1/3 1/1 10/1 R80, research and development Note that labor hours in Mexico are four times those in the United States, reflecting Mexico's lower productivity. Also note that the ratio of skilled to unskilled labor used in each activity increases as we move to the right, from 1/5 in assembly to 10/1 in R&D. Suppose that the wage of U.S. unskilled workers is $12 per hour and that of skilled workers is $28 per hour and that the wage of Mexican unskilled workers is $2 per hour and that of skilled workers is $6 per hour (these values are made up to be convenient, not realistic). Also suppose that the trade costs are 20%, 30%, or 50% of labor costs, which means that an additional 20%, 30%, or 50% is added to the costs of outsourcing to Mexico. a. (10 points) Fill in the blank cells in the following table by computing the costs of production of each activity in each country (two cells are filled in for you). Assembly Office Services R&D Component Production $48 Mexico $64 United States Imported by U.S. from Mexico, Trade cost = 20% Imported by U.S. from Mexico, Trade cost = 30% Imported by U.S. from Mexico, Trade cost = 50% b. (5 points) With trade costs of 50%, where is the value chain sliced? That is, which activities are cheaper to import from Mexico and which are cheaper to produce in the United States? c. (5 points) With trade costs of 30%, and then 20%, where is the value chain sliced