The Maketng Mantra

Name:______________

SSI 2007, 160A Final Professor Farshid Mojaver

Problem 1: Ricardian Model [12 points total, 2 pts each part]

Answer the following questions using the information implicit in the following PPF curves for Home and Foreign:

[pic]

a) Suppose that the number of workers doubles in Home.

i) What happens to the Home PPF

Shifts out parallel to itself.

ii) What happens to the no-trade relative price of grain?

Does not change.

b) Suppose that there is technological progress in the grain industry, so that Home can produce more grain with the same amount of labor.

i) What happens to the Home PPF (show this in the figure above)

Home PPF pivots out: same cloth more grain.

ii) What happens to the Home opportunity cost of grain production?

Falls

iii) What happens to the after-trade relative price of grain?

It falls if it is a large country.

iv) Assuming the country in question is a small country what happens to the ratio of Home-Foreign wage rates? Explain your answer.

W/W* = (MPLG↑ / MPL*C ) x ToT => W/W* rises

Problem 2: Sector Specific Model [12 points total, 8 and 4]

In the specific factors model where labor and land are used to produce Food and labor and capital are used to produce Manufacturing products, suppose that price of manufactured goods falls while the price of agriculture is unchanged (i.e. ΔPM/PM < 0 and ΔPA/PA = 0).

a) Arrange the following terms in descending order:

ΔRT/RT , ΔRK/RK , ΔPA/PA , ΔPM/PM , ΔW/W

ΔRT/RT > 0 = ΔPA/PA > ΔW/W > ΔPM/PM > ΔRK/RK

b) How does the marginal productivity of capital (MPK) change and why?

as PM↓=> LM↓=> K/LM ↑=> MPK↓

Problem 3: Heckscher-Ohlin Model [10 points]

Using a graph show that an in crease in the relative price of capital intensive computer to labor intensive shoe will reduce Wage-Rent ratio, that is:...