Assume that home produces contraptions in autarky

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Assume that home produces contraptions with capital and labor, and two stages of production: parts and assembly. Part production is capital intensive, and assembly is labor intensive. a) Assume that home produces contraptions in autarky. Show the PPF for parts and assembly, assuming that home is capital abundant. Assume that the production function for contraptions has a zero elasticity of substitution between parts and assembly, so the isoquants are L-shaped. Show the autarky isoquant and the relative price of parts to assembly. b) Assume that foreign also produces contraptions in autarky, but foreign is labor abundant. Assuming it has the same isoquants as home, show the autarky isoquant. How does the relative price of parts to assembly compare to home? c) Suppose that the home contraption industry buys up the foreign contraption industry, and decides to outsource. Which process is outsourced, parts or assembly? Show how internal trade through outsourcing would allow more contraptions to be produced, in home and foreign combined.

Reference no: EM131393510

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