1. In the short-run specific-factors model, analyze the effects on a small country following an environmental catastrophe that damages its capital. Assume that capital is specific to the manufacturing sector, and land is specific to the agricultural sector, while labor is mobile between the two sectors.
A) Show the impact of the decrease in capital on the allocation of labor and the equilibrium wage.
B) Show the impact of the decrease in the workforce on the output of each industry (show with PPFs and explain).
C) What happens to the rentals on capital and land? Assume the final output prices, i.e., PAg and PManu are unchanged (this is referred to as the small country assumption).
2. In the long-run O-H model, with two goods, apparel and computers, analyze the effects on a small country following an environmental catastrophe that damages its capital.
A) Show the impact of the decrease in capital on the allocation of labor and capital.
B) How does this event affect wages and rent (on capital).
C) What happens to each industry's outputs? (show with PPFs and explain).
3. Assume for the previous scenario (from question 2) that the Factor-Price Insensitivity Theorem still holds, explain the outcome. Be specific in your answer: discuss what happens to wages, rent, output of apparel, and output of computers.