Suppose that an economy produces apparel and plastics with skilled and unskilled labor. The economy has 120 units of unskilled labor and 100 units of skilled labor. Under the initial conditions, the relative price of apparel is equal to pA/pP = 1.2, factor prices are such that apparel producers use 2.2 units of unskilled labor and 1 unit of skilled labor for each unit of output, and plastics producers use 1 unit each of skilled and unskilled labor. However, when trade is opened, the relative price of apparel rises to pA/pP = 1.4, so the relative unskilled wage rises, and both industries substitute toward skilled labor. Suppose that after the change, apparel producers use 2 units of unskilled labor and 1.2 units of skilled labor for each unit of output, and plastics producers use 0.6 units each of unskilled labor and 1.2 units of skilled labor.
(a) Show the factor-use points given on a unitisoquant diagram as in Figure 6.12. Do not worry about wages or the isocost lines. Sketch what the whole isoquant might look like for each industry, based on the two points for which you have data.
(b) Compute the output of each industry before and after trade has opened up.
(c) Use the information you have derived in (b) to compute the relative supply of apparel before and after trade, and plot those two points on a graph with the relative supply of apparel on the horizontal axis and the relative price of apparel on the vertical axis. Sketch what the rest of the relative-supply curve might look like, based on the two points for which you have data.