Consider an economy which is producing two goods computers (C) and shoes (S) using two factors of production capital and labor. To produce one computer, it requires 200 units of capital and 5 units of labor. To produce a pair of shoes, it requires 10 units of capital and 1 units of labor. (Unlike the Cobb-Douglas production used in the text, here we are using fixed proportions (Leontief) production functions to make the math easier. That is, the 2 inputs are used in fixed proportions and cannot be substituted for each other) Required:
a. Calculate the capital/labor ratios used in computers and shoes. Which good is more capital-intensive?
b. Using the information on goods prices and the production function for the two goods calculate the wage and the rental rate of capital.
c. Suppose the price of computer increases to $650 but the price of shoes remains at $40. Verify the Stolper-Samuelson theorem.