ECON 433

ECON 433

Problem Set 3
Answer Sheet
Econ 433
Fall 2014
Due 10/16/2014
Name:
Please use this sheet to make grading easier.
1. Circle one of the following.
a. True, False
b. True, False
c. True, False
2. Fill in the blanks as instructed.
i. Equilibrium output is ______ Food, _____ Cloth. (Put in numbers)
ii. As price of Food rises, real wages _____ and the real return to capital ____. (Choose from
rises and falls)
iii. Output of Food _____ and of Cloth ____ as capital rises. (Choose from rises and falls)
3. Circle one
i. True/False. “The demand for skilled labor shift out to keep wages the same. The demand for
skilled labor rose purely through Israel making more of the skill intensive good.”
ii. Yes/No. “Would you be surprised to know that the output of skilled labor intensive goods
rises?”
Problem Set 3
Do all problems:
1. (30) Answer true or false and why. Write no more than one paragraph for each question.. .
a. Offshoring work reduces national income.
b. There is never a secondary burden of a transfer since the decrease in our consumption is
exactly matched by the increase in theirs.
c. Growth in an economy can never hurt it as it moves its PPF outwards allowing them to have
more of all goods.
2. (40) Assume the following fixed coefficient technology.
Good/Factor Unit Labor Requirement Unit Capital Requirement
Clothing 10 20
Food 20 10
Assume there are 100 units of labor and 100 of capital at home and that the price of food
equals that of clothing which equals 1.
Below draw the answers to the question for the example on the left and for the general model
on the right hand side so you can see them side by side.
makes both goods and imports food, depict the equilibrium under free trade in a diagram. In
the answer sheet above put how much of each good is made in equilibrium.
ii. For given product prices, explain how factor prices are determined. If the price of food rises,
but there is incomplete specialization, what happens to real wages and to the real return to
capital. In the answer sheet above fill in the blanks on how factor prices change.
iii. For given product prices, and assuming no specialization, explain how the PPF is affected
and how the equilibrium output changes as capital stock rises. In the answer sheet above fill
in the blanks on how output changes.
2. (30) Israel, which is a small open economy (so that world prices can be assumed fixed for it)
had a huge inflow of skilled labor after the breakup of the former Soviet Union. Population
rose by 11% and labor force by 14%, mostly of skilled labor. Israel makes software which is
skilled labor intensive, and oranges, which are unskilled labor intensive. These are the only
two factors of production.
One might be inclined to argue that this must have reduced the wage of skilled labor as skillled
labor supply shifted out, but demand was unchanged.
a. However, evidence on wages shows no such tendency. How can you explain this in the
absence of technical change? Did the demand for skilled labor shift out to keep wages the
same? Why? (Hint: Use the Rybczynski Theorem.)
b. Would you be surprised to know that the output of skilled labor intensive goods rises