Consider the Heckscher-Ohlin model. The relationships among prices and marginal costs of producing cheese and bicycles at home are represented by the equations. Show work. For rounding purpose, keep two digits after the decimal point.
Pc = 15w + 8r, and Pb = w + r,
where Pc ≡ the price of cheese, Pb ≡ the price of bicycles, r ≡ the rental rate of capital, and w ≡ the wage rate.
a. Which good is the relatively capital intensive good? Why?
b. Under autarky, the price of cheese is $239 and the price of a bicycle is $22. What are the equilibrium wage and rental rates?
c. With trade, the price of bicycle in the home country rises 20 percent while the price of cheese remains the same. According to the Heckscher-Ohlin theorem, is the home country relatively labor abundant or relatively capital abundant? Why
d. What are the equilibrium wage and rental rates after trade at home?
e. Using your answers above, explain the Stolper – Samuelson theorem by describing what happens to the real earnings of labor and the real earnings of capital under trade.