Chapter 6 TRADE AND LOCAL INCOME DISTRIBUTION: THE ...

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11. The unit isoquant illustrates the variety of techniques that can be used to produce a unit of a given commodity. The diagram below shows the combinations of capital and labor that are required to produce a unit of x. (a) Suppose that relative factor prices are given by the slope of line 1. Is it efficient for the producer to adopt techniques B and C to produce x? Why or why not? (b) Now suppose the wage rate in this economy increases and the isocost curve becomes line 2. How will the producer of x respond to the increase in the wage rate? PROBLEMS 1. Production in International Trade: If a country requires capital and labor to produce clothing, and land and labor to produce food, and the country has a fixed resource base, explain why the country is still apt to put some resources into food production, even when it is an exporter of clothing. In other words, why doesn't this country specialize in its export good? (Hint: The curvature of the production possibilities frontier has something to do with this. What determines its shape?)
2. The Determination of Factor Prices in a Small Open Economy: In each of the cases below, draw in the shift(s) of the appropriate value of the marginal product of labor curve(s) and determine the change in the wage rate relative to the price of clothing and the price of food. (a) A 10% increase in the supply of capital, (b) A 10% increase in the supply of labor, (c) A 10% increase in the (absolute) price of food, holding the price of clothing constant. 3. Changes in the Distribution of Income: The legislature of a small country engaged in trade is contemplating a tariff on imports of food that will raise the domestic price of food by 10%. Food production requires labor and land; clothing production requires labor and capital. (a) Rank the changes in the returns to land and capital (rT and rK) and labor (w) relative to the change in the price of food. (b) Do landlords stand to gain unambiguously from the proposed tariff? Must capitalists see their returns fall? In each case, explain why or why not. (c) Suppose that workers, landlords and capitalists all have the same taste patterns, and that the country imports food. Explain how laborers would react to the proposal. Who would support a political action committee (PAC) to enact the tariff?
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