Consider an economy that produces manufacturing goods and R&D services with two types of high skilled workers (Engineers and Scientists) and one type of low-skilled workers. The production technology for R&D services is high-skill-labor intensive, while manufacturing is low-skill intensive. In the medium-run, engineers are stuck in the manufacturing sector and Scientists are stuck in the R&D but the low-skilled workers can move between the two sectors. In the long-run, however, all factors are mobile. Suppose that this economy opens up to free trade and experiences an increase in the relative price of R&D services. Answer the following questions using appropriate theorems and concepts.
a. Is this country abundant in high-skilled or low-skilled labor?
b. What will happen to the size of each industry in the medium and long run?
c. What is the welfare impact of trade liberalization on each factor of production in the medium run?
d. What is the welfare impact of trade liberalization on each factor of production in the long run?