1. Consider a manufacturing firm using human capital at home to produce two inputs, ‘R & D’…

1.     Consider a manufacturing firm using human capital at home to produce two inputs, 'R & D' and 'components'. The firm combines the two inputs to produce computers.

Draw the following on a diagram with 'R & D' on vertical axis and 'components' on horizontal axis.

a.      The PPF of 'R & D' and 'Components'.

b.     Isoquants of computer production.

c.      Show the closed economy equilibrium and label the computer output as 100

d.     The firm discovered that they can buy 'components' cheaply from a foreign country, and decided to outsource part of the production of those rather than producing all of them at home.

i.     What happens to the relative price of 'R & D' and 'Components'.

ii.     Show the change in a new diagram

iii.     Show the level of output of computers

iv.     Does the firm export 'R & D”?

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