Problem
Suppose that there are two outputs - non traded good 1 and traded good 2 - and three inputs - labor, capital, and imported inputs. Assume that the cost share of labor is higher in good 1 and the cost share of capital is higher in good 2. The prices of both outputs are treated as fixed initially, but the price of the imported input increases.
(a) Write down the zero-profit conditions and totally differentiate these.
(b) Determine the impact of the increase in the imported input price on the wage and rental, assuming that the traded good has a higher cost share of imports.
(c) If the price of the non-traded good changes endogenously due to the increase in the price of imported inputs, how will this affect your conclusions in (b)?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.