Equations

Question 1

Wages in Ricardian Model

Answer 1

1. W_A= P_{goodA •} MPL_goodA
2. Labor free to move across industries, so Wages equal

P_A • MPL_A = P_B • MPL_B

3. Rearranging gives you relative price = opportunity cost

P_A/P_B = MPL_B/MPL_A

4. wages across countries : home country produces good A, so home wage can be considered as
   a) In terms of Product A: MPL_A
   b) In terms of Product B (P_A/P_B) • MPL_A

Question 2

Rental On Capital

Answer 2

R_K = P_M • MPK_M

R = rental on capital

M= manufacturing industry

MPK = Marginal Product of Capital

Question 3

Cobb- Douglas Production Function …fuck me

Answer 3

Curved isoquants (u shaped babies)

1. QApparel = AKªL^(1-ª⁾

• ª = capital intensity of an industry
• A = neutral productivity shifter AKA who cares?

2. To Graph:

K= L^(ª-1)/ª / (Q_apparel)^-1/ª

3. For all combinations of K and L that produce 1 unit of Apparel (Q apparel = 1)

K= L^(ª-1)/ª

4. Because isoquant cost line means P_apparel • Q_apparel = 1; Q_apparel = 1/P_apparel
   a) substitution:

K= L(ª-1)/ª / (1/P_apparel)-1/ª

5. Isocost Line : sum of what is paid to labor and capital equals $1 (wL + rK = 1)
   rewrite: K = 1/r- (w/r)L

•slope: -w/r, the relative price of labor

Question 4

Leontief Production Function

(fixed factor/ intensities)

Answer 4

L shaped isoquants

1. Q_A = min (K_A/ ß_A, L_A)

Under Leontief production, amount of K and L used to produce one unit of output is fixed at (β_C,1) in chemicals and (β_A,1) in apparel

• Capital-labor intensity in chemicals (K_Chem/L_Chem) is thus fixed at β_C
• Capital-labor intensity in apparel (K_Apparel/L_Apparel) is thus fixed at β_A

•β_C >β_A

Does not allow the possibility for substituting capital for labor and vise versa in production