Question

Consider an economy in which two factors of production, labor and capital, produce two goods: capital-intensive pharmaceuticals and labor-intensive clothing. Suppose that both factors of production are freely mobile across both industries and that all producers, consumers, capitalists, and workers are price takers. Suppose that there are currently steep tariffs on all imported goods, but there is a bill before Parliament to eliminate those tariffs, and the government has invited citizen representatives of workers and capitalists to express their opinions on the matter. Suppose that all citizen representatives understand the consequences of eliminating the tariffs, and suppose as well that each representative wants to maximize his or her real income. The parliamentary hearing takes testimony from four groups, representing workers in the clothing industry, capitalists in the clothing industry, workers in the pharmaceutical industry, and capitalists in the pharmaceuticals industry, respectively.(A) If this economy is capital abundant relative to the rest of the world , which of these four groups do you expect to support the tariff elimination bill , and which do u expect to oppose it? why?

(B) Now, suppose that the country is labor - abundant relative to the rest of the world, and answer the same question , explaining any differences there might be with the previous answer.
(C) How would your answer now change if , instead of being freely mobile, we assumed that both labor and capital were sector- specific?
(D) Comment on how the mobility of immobility of factors across industries affects the nature of political conflict we can expect to see over trade policy.

Answer 1

The Cobb Douglas Function of production is F(K,L) =
`(k^(\alpha )). L(1-\alpha` . This implies either factors of creation can be given to K (capital) or L (work). In the event that you give increasingly funding to the capacity, you'd produce more pharmaceuticals and on the off chance that you dedicated more work to the capacity, you'd produce all the more dress.

The subsequent stage is to take a gander at the presumptions in the issue, "the variables of creation are unreservedly portable and all the individuals engaged with the procedure are cost takers." These suspicions are significant on the grounds that the last one suggests that the nation doesn't make the cost which is implies that they live in a free market framework and they can't direct the cost so any surge of imports will seriously constrain the benefits of some industry while profiting by the region not affected by the expansion in imports. The unreservedly portable components of creation is the superstar as it expresses that each factor of creation can be utilized in either pharmaceuticals or attire (so all the information sources [raw materials, time, worker hours, lease and wages] are viewed as genuinely equivalent regarding expenses and relative productivity).

Here's the place it gets intriguing as each factor of creation is partitioned into laborers and business people; so we have to include another viewpoint into our Cobb-Douglas Function which is a capacity for cost. F(Cost) = ([wages * labor] + [rent * capital]) which is improved into F(C)=wL+rK. Be that as it may, the higher the cost capacities are contrarily sway the income of the business people since more costs mean less cash coming into Mr. BigCat's pockets. Subsequently, when considering section (An) and (B), consider the expanded costs (useful for workers as the industrialists should build compensation so as to keep their laborers from either leaving to work abroad or leaving to work at the other business (attire or pharmaceuticals)) and diminished incomes (awful for entrepreneurs as possibly less expensive merchandise will compel them to bring down costs to the world value which harms their main concern) as far as the new levy decrease bill. In the event that the world is increasingly capital rich, they're better at making x which implies they can do it at a less expensive cost which would hurt one of the players in the capital-concentrated area.

For Part (C), this is the place understanding the uninhibitedly versatile elements of creations is extremely significant. Beforehand, laborers in either division could move pixie uninhibitedly to and fro among dress and pharmaceuticals. Presently, if the elements of creation are more area explicit, they won't have the option to move their aptitudes over to the division which implies, they might be progressively hesitant to another surge of imports since then they would experience more difficulty looking for some kind of employment. That carries us to part (D) which you can consider like the car business inside the US particularly since the ascent of other European fare vehicles (by and by, I like my vehicles Italian and quick, fill in the spaces) in any case, with that ascent in European imports, numerous individuals in vehicle making segments in the nation felt like their whole vocations were undermined in light of the fact that they felt their abilities were not portable enough to either move or secure another position.