Consider a 2x2x2 Hecksher-Ohlin model where the home economy’s production functi

Question

Consider a 2x2x2 Hecksher-Ohlin model where the home economy’s production functions are given by

Q(x)= AKL^1

Q(y) = BKL^1

where Qi is production of good i, and Ki and Li are capital and labor employed in industry i, i {x, y}. The model parameters are A = B = 5, = 0.25, and = 0.5. As the home economy is in autarky, the market prices of goods x and y are Px = $10 and Py = $10, while the factor prices are w = $30 for labor and r = $20 for capital. Answer the following questions:

1. What is the degree of capital intensity in the x industry? Show your work. [Hint: it is more convenient to measure MPK and MP L using the intensive-form production functions

Explanation / Answer

In the industry X, Q(x)= AKL1

MPK = Ak-1 L 1- = 5* 0.25*k -0.75 L0.75 = 1.25 * (L/K) 0.75

MPL = A(1-) k L 1--1 = A(1-) k L- = 5* 0.75 (K/L)0.25

Defree of capital intensity in industry X = MPK / MPL = 1.25 * (L/K) 0.75/ 3.75 (K/L)0.25 =0.33* L/ K

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.