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Econ 433 Fall 2014




Question;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;Clothing10 20;Food20 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 economy;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?


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