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A small open economy uses a mobile factor (labor) and two specific factors, dry land (D) and wetland (W) to produce two goods, cactus and rice. Dry land is only productive in growing cactus and wetlands can only grow rice. Presume the world relative price of cactus is higher than the Home autarky price ( P_c(World)/P_R > P_c/P_r ). !!

1. With the aid of a diagram compare the autarky and trade equilibrium for cactus and rice.

2. With the aid of a diagram determine the effect of trade on the allocation of labor (LC and LR) in each industry.

3. With the aid of a diagram and the wage setting equation decide the effect of trade on the real wage in terms of both cactus and rice.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91227122

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