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Econ 433 Fall 2014 problem set 3




Question;Econ 433 Fall 2014;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;fromrises 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 forskilled 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 goodsrises??;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;isexactly matched by the increase in theirs.;c. Growth;in an economy can never hurt it as it moves its PPF outwards allowing them to;havemore 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.;i.;Depict the Production Possibility Frontier (PPF);for the economy. Assuming the economymakes 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;theabsence 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?


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