PROBLEM SET 4: SPECIFIC FACTORS AND INCOME DISTRIBUTION
4.
a) When we increase the supply of capital, the production possibilities from good 1
increase, because it is produced with capital and labor. While the possibilities for the
good 2 remain the same because it is not affected by capital. As a result, the
production possibility frontier (PPF) moves towards the right.
The Production Possibility Frontier
(PPF)
b) With the increase in capital in the Home country, it will be able to produce more good
1, while the quantity that it can produce from good 2 is still the same. In
consequence, the relative supply of Home country increases.
On the other hand, there has
not been any changes in the
Foreign country factors of
production so there is no
change in their relative supply.
