Ricardo-Viner Model

Question 1

Key assumption of the Ricardo-Viner Model

Answer 1

capital is industry-specific but labor is mobile

Question 2

Explain what happens if price changes

Answer 2

page 25 (price increasing > wage increasing)

Question 3

Price change: what happens in the long run?

Answer 3

in the long-run, capital would flow from industry 2 to industry 1

Question 4

Explain what happens if endowments change

Answer 4

The new equilibrium indicates a fall in the wage rate. Furthermore, the increase in labor in industry 1 is smaller than the total increase in the labor endowment.
Hence, the specific factors in both industries experience a rise in their rental rates. (why?)
The output of both industries increases.

Question 5

model conclusions

Answer 5

an increase in the endowment with the mobile factor increases output in both industries
an increase in the endowment with a specific factor increases output in that factor’s industry and decreases output in the other industry