QUESTION 4 A small open economy produces two goods, 1 and 2, at output levels y, i = 1, 2. Output prices are set on world markets and denoted P1, P2. The economy is endowed with quantities L of labour and K of capital. Capital is used in sector 2 only, and labour is used in both sectors, Li denoting the use of labour in sector i = 1,2. The wage rate and the capital rental rate are w and r, respectively. The production function for good 1 is 1 L₁, and good 2 has production function 1/2 = √KL2. What is the equilibrium allocation of labour between sectors (expressed as a function of goods' prices and endowments)? O a. L₁ L-(K, L₂ = (1)²K. O b. L (K, L₂ = L-(,)²K. O c. L₁ =0, L2 = L. O d. L₁ =L, L2 = 0.

Capital goods D Which of the following would cause an inward (left) shift of the PPC? B A A tax is decreased on business machinery - Consumer goods Favorable weather allows for a 50% yield increase in crops There are new technological advances in all industries The cost of inputs increases

QUESTION 4 A small open economy produces two goods, 1 and 2, at output levels y;, i = 1, 2. Output prices are set on world markets and denoted p1 , P2. The economy is endowed with quantities L of labour and K of capital. Capital is used in sector 2 only, and labour is used in both sectors, L; denoting the use of labour in sector i = 1, 2. The wage rate and the capital rental rate are w and r, respectively. The production function for good l is y1 = L1 , and good 2 has production function y2 = VKL. Consider the economy form Question 4. Suppose that there is another economy, which is identical to the first one but has a greater endowment of capital K' > K.what is the output of good 2 in either economy? Assuming that consumers in both countries are identical, what is the pattern of trade between those two countries? O a. The first country produces y2 = K and the second country produces y½ = K'. Therefore, the first country exports good 1 and а. 2p imports good 2. O b. The first country…

Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cars (c) and pharmaceutical drugs (d), and three factors, capital K, skilled labour S, and unskilled labour L. The production functions are given by 1 F.(Ke, Le) = K. Lễ and Fa(Ka, Sa) = K}S}. That is, skilled labour is specific to pharmaceutical drugs, and unskilled labour to cars. Suppose that the countries' factor endowments are KH = 2 = KF, and LF = 3/2, and SH LH :1 || 1 and SF = 1/2, so that the total labour force is 2 in both countries. The price of capital is denoted by r, the price of skilled and unskilled and normalise pa = labour by w, and wi. Denote the goods' prices by pc and Ра, : 1 for simplicity. The demand for cars and drugs in country j = H, F is given by x and r: %3D 2Yi and ra 3 pe 1Yi %3D 3 pa where Y' denotes aggregate income in country j. (a) Draw or compute the PPFS of Home and Foreign.