November 24, 2016

Question
Fall 2013
Homework 4: Due in Class, October 22, 2015
Problem 1: (Offshoring) A good is produced using three production activities (a, b, and c) that
each use skilled and unskilled labor. The table below shows the number of skilled and unskilled
workers needed to produce one unit in each production stage.
A
b
c
Skilled labor
1
2
3
Unskilled labor
4
3
2
There are two countries Home (H) and Foreign (F). The skilled worker wage is \$4 in H and \$5
in F. The unskilled worker wage is \$2 in H and \$1 in F. Transport costs of \$2 per unit must be
added to cost of a production stage if that production stage is outsourced to F.
1a.
Given this information, which production activities are done in which countries?
1b.
If the transport cost falls to zero, what happens to the location of production of each stage
(assume that the wages don’t change).
1c.
Calculate and compare the skill/unskill ratio of production in the two countries before
and after the fall in transport costs. What has happened to relative demand for skilled
labor in each country?
Problem 2: (Monopolistic Competition) A firm located in Home is making a variety of a
differentiated good in a monopolistically competitive industry. The firm needs 20 workers to
maintain its plant (fixed cost) and one worker per unit of output (marginal cost). Each worker
costs \$5.
2a.
In autarky, the firm sells 10 units and is breaking even. What price is it charging?
2b.
Home goes from autarky to free trade. In the new long-run equilibrium, the firm charges
\$10 per car. How has the firm’s productivity (output per worker) changed?
2c.
Explain, using the appropriate diagram, how trade caused the output and price charged by
the firm to change.

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