Q-2: In a Heckscher-Ohlin model setting, an economy producing only cloth and foo
ID: 1146228 • Letter: Q
Question
Q-2: In a Heckscher-Ohlin model setting, an economy producing only cloth and food has a total of 150 units of labor (L) and 400 units of capital (K). Furthermore, production of cloth uses 100 units of the total labor and 200 units of the total capital while production of food uses 50 units of the total labor and 200 units of the total capital. Now suppose economy's labor force grows by an additional 30 units of labor, ceteris paribus Atasiven (unchanging) relativepriceofcloth (PopF), show and justify by calculation that the increase in labor resource would cause in shift of labor and capital from food to cloth, resulting in more production of cloth but less. production of food! (12p) b) Draw and briefly comment on a generic graph illustrating your conclusion in part (a): The biased expansion of production possibilities (a biased shift of production possibility frontier) (1op)Explanation / Answer
INITIALLY,
L=150, K=400
Cloth- L=100, K=200 Food- L=50,K=200
a) Now as the labour resource increases by30 units, L= 150+30=180
1)Cloth- L=100+30=130, K=200 Food-L=50+0=50, K=200
2)Cloth-L=100+0=100,K=200 Food-L=50+30=80,K=200
3)Cloth-L=100+10=110,K=200 Food-L=50=20=70,K=200
4)Cloth-L=100+20=120,K=200 Food-L=50+10=60,K=200
Cloth requires more labour than capital in production. when the units of labour increased ,the production of cloth increased too. in cases 1,2,3,4 it is shown that the increase in labour increased the production of cloth.
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