Trade Problem Set 60 3-1




1. Suppose it requires 10 units of labor and 5 units of land to produce a ton of steel while it requires 2 units of labor and 4 units of land to produce a ton of wheat. Suppose the price of steel is $300/ton and the price of wheat is $100/ton.

A. Graph the lines along which the price and production cost are equal for steel and wheat.

B. What is the equilibrium wage rate and rental rate on land?

C. Suppose the price of steel rises to $350/ton. Graph the effect of this change on a new graph and find the new equilibrium factor prices.

D. Calculate the percentage changes of each output and factor price.

E. Construct the appropriate magnification effect relationship for prices for this example.

2. Imagine a two-good H-O economy which imports automobiles and exports wheat. Suppose the production of these two goods use only capital and labor. If the government raises a tariff on the import of automobiles it will raise the domestic price of autos. Suppose the price of wheat remains constant.

A. Apply the magnification effect on prices to explain who in the economy will gain and who will lose because of the tariff. Be sure to state any additional assumptions needed to answer the question.

B. Are the effects described in part A short-run effects or long-run effects? Briefly explain why.

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Last Updated on 7/31/06