Topic 9: Special Factors Model

Question 1

What are the features of the special factors model?

Answer 1

• Three factors.
  
  • Labour is mobile.
  • K is specific to good A.
  • T is specific to good B.
• Diminishing marginal returns has the production curve bow out.

Question 2

Show how the labour market is naturally determined in the model.

Answer 2

Question 3

Show the result of a proportional rise in both goods price, in the labour market. (In the Special Factor Model.)

What are the welfare results?

Answer 3

The wage rises by the same proportion. So nothing changes.

Question 4

Show the result in the labour market from the change in the relative good prices.

Answer 4

• Wage increases but by less than 50%.
• Land owners are better off.
• Capital owners are worse off.
• The effect on workers is ambiguous.

Question 5

What is the result of free trade in the SFM model?

Answer 5

• Increase in welfare for the factor of the exported good.
• Decrease in welfare for the factor of the imported good.
• Net increase in welfare, same graph as the HO model.