Developia produces two goods, manufactures and food, using three factors of production: capital, land and labor. The production of manufactures requires capital and labor, while the production of food uses land and labor. All the arable land is in the south while all the factories are in the north. Labor is mobile between regions and sectors. The economy faces a given world prices of cloth and food, and has given endowments of capital, land, and labor. Let the price of cloth be one.
a: Explain how to draw the PPF.
b: What is the effect on the allocation of labor between sectors and of output of the two goods in Developia of a freeze in the rest of the world that resulted in an increase in the world price of food.
c: How does this affect the production point along the PPF?
d: What is the effect of the freeze on the nominal and real earnings of each of the factors?
e: The freeze also results in migration into Developia. What is the effect of this migration on the post freeze equilibrium? In particular, what happens to the PPF, to the output and to the nominal and real earnings of the three factors?