Y7

Question2 (35 points) Suppose there are two goods, wine and automobiles, produced by three factors labor, land and capital, in Italy. Assume that land is specific to wine, capital is specific to automobiles, and labor is free to move between the two industries. (a) Suppose the price of automobiles increases by 10% and the price of wine increases by 5%. What is the impact of price changes on the welfare (real income) of each input factor owners in Italy? Explain. Wernational Continued) (b) Suppose some low-cost countries in East Europe join the European Union and firms in Italy decide to conduct outward FDI in these low-cost countries (i.e., establish affiliates in these countries). Suppose the output prices do not change. What is the impact of outward FDI on the welfare (real income) of each input factor owners in Italy? Explain