True, False or Uncertain
Each True-False-Uncertain question is worth 10% of the homework. The score is awarded for the explanation of the choice of an answer, not for the correctness or incorrectness.
1. In Ricardo-Viner model with mobile labour, an increase in prices of even one of the goods will lead to an increase in wages, that will in turn decrease profits of producers.
Uncertain, because the profit of producer does not only depend on the increase in wage of labour, it also depends on the ratio of capital-labour change (Econ, 2017).
2. In Heckscher-Ohlin model, in a world of two factors (labor and land) and two goods, an increase of the retirement age will lead to an increase of the production of the land-intensive good.
False, since it is land-intensive it will depend on land of country of production. It could have been true if it was labour-intensive goods.
3. In Heckscher-Ohlin model, with free trade, prices of factors must be same in all countries.
True, Because H-O model suggest restructuring of capital with owner and cost of labour will happen. as it will cause increase in wage of labour of country where abundant labours are present and equally the cost of exported price will also go up. So the factor wil remain same (Financetrain, 2017).
4. Ricardo-Viner model is a simplified Heckscher-Ohlin model.
True, Because specific factor model is a simple variant of the Heckscher-Ohlin model (Internationalecon, 2017).
1. What is the cheapest Tech of producing the good?
As w is max, so obviously r is too less, so goods price is least in Tech 1. It is the cheapest option.
2. What is the cost of producing the good as a function of w and r?
Cost of production (p)=w.r, so
Tech 1, p=4*negligible =negligible
Tech 2, p=1*1=1
Tech 3, p=0.25*2.25=0.5625
3. If there is perfect competition, what does this imply about the price of the good p?
In case of perfect competition, the cost of goods p = negligible for Tech 1.
4. Tech 4 can be developed, where producing 1 unit of good requires 1.44 units of labour and 0.64 units of capital. When would this technology be profitable? What can happen to prices with the introduction of this technology?
Tech 4, w=1.44, r=0.64
p=w*r = 1.44 * 0.64 = 0.9216
to make it profitable, p must go below Tech 3, i.e. 0.5625
hence, at r=p/w = 0.5625/1.44 = 0.39.
so, at 0.39 labour cost, it can be as profitable as Tech 3.
And with the introduction of this technique, the price of the product will definitely go up.
5. If Tech 4 is not implementable under current factor prices, should anyone invest into making it available for producers?
As the production price of Tech 4 is higher then other available techs, so this option will not attract any producers to invest in.
6. If other producers manufacture another good with a price of q and the technology that uses 2 units of labour and 3 units of capital, what is the value of q? What will happen to w and r if q increases? Why?
Price of production (q) = w*r
So, q=2*3= 6
‘q’ increased much higher compared to other Techs, but as the goods are different, so it cannot be compared with other available options. Beause for different goods, different are the production price.
FinanceTrain (2017). Ricardian and Heckscher-Ohlin Models of International Trade. [Online]. Available at: https://financetrain.com/ricardian-and-heckscher-ohlin-models-of-international-trade/ (Accessed 13 March 2017).
Internationalecon (2017). The Specific Factor Model – Overview. [Online]. Available at:
https://internationalecon.com/Trade/Tch70/T70-20.php (Accessed 13 March 2017).
Econ (2017). Specific Factors Model. [Online]. Available at:
https://www2.econ.iastate.edu/classes/econ355/choi/spe.htm (Accessed 13 March 2017).
Youtube (2017). Heskscher Ohlin Theory. [Online]. Available at:
https://www.youtube.com/watch?v=uFZbkuANodA (Accessed 13 March 2017).