Problem Set #3 Due Tuesday, February 28 Make sure to show your work! 1.

. Assume we are in an H-O world without substitutability. The unit requirements for H are as follows: !! = 12 !! = 1 !! = 4 !! = 2 Assume that H has an initial endowment of L=120 and K=90 a. b. c. d. Draw the Edgeworth box for this economy. Solve for the equilibrium quantity of labor and capital used in each sector Solve for the equilibrium quantity of goods 1 and 2 If labor doubles to 240, illustrate this expansion in labor via the Edgeworth box and the new PPF. You may use whatever method you prefer to find the new EQ quantities of goods and factors.

2. Assume that we are in a Specific Factors world. If there IS substitutability between labor and the specific factors please explain and illustrate using a 4quandrant graph, what the PPF might look like. 3. Assume we are in an H-O world without substitutability. Given are the unit requirements: !! = 50 !! = 200 !! = 1 !! = 1 Further assume that H is endowed with 1000 units of labor and 10 units of capital. What must be true about world price when there is open trade to guarantee that H only produces good 1? What must be true to guarantee that H only produces good 2. 4. Using the Stolper-Samuelson graph from the H-O model show a situation in which technology differs between H and F in that G1 is the labor intensive good for H and G2 is the labor intensive good for F. What would you predict would happen when we open trade if H is the labor-abundant country? 5. What are the strengths and weaknesses of the H-O model? As a trade economist what do you find the most valuable insights from the model? What additions/changes would you make to the model? What complications does this add to the model.