Assume the Heckscher-Ohlin model with two factors of production, labor and capital, and two goods, shoes and computers. Wages comprise 50% of the production costs of shoes (sLS = .5) and 25% of the production costs of computers (sLC = .25). Assume that trade causes the relative price of computers to rise by 10% and causes rental payments to capital (R) to rise by 20%. a. Calculate the effect that trade will have on wages. b. Use your answer in part a to show the effect that trade will have on the price of shoes. Show your work.

Assume the Heckscher-Ohlin model with two factors of production, labor and capital, and two goods, shoes and computers. Wages comprise 50% of the production costs of shoes (sLS = .5) and 25% of the production costs of computers (sLC = .25). Assume that trade causes the relative price of computers to rise by 10% and causes rental payments to capital (R) to rise by 20%. a. Calculate the effect that trade will have on wages. b. Use your answer in part a to show the effect that trade will have on the price of shoes. Show your work.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter13: General Equilibrium And Welfare

Section: Chapter Questions

Problem 13.6P

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