Question

hi! this question including the solution. My question is in part(6), how does reduction in offshoring costs leads to fewer low skill intensive activities being performed in France? Could you explain more details in part(6) answer? thank you!

Question 1: Offshoring with Leontief Technology. Suppose that there is a continuum 10,1] of production activities (intermediate goods) in which different countries specialize depending on their wages and the costs of offshoring. Let a e [0, 1] represent the degree of skill intensity of a particular activity with a higher a (closer to 1) representing a higher level of skill intensity. Suppose that the production function for a particular activity is Leontief so that the unit cost of producing activity with skill intensity o is where w and w are the wages for high- and low-skilled labor respectively. Suppose that there are two countries, Morocco (M) and France (F) withi wages as tabulated below: . Morocco France High-Skilled 8 9 Low-Skilled 2 3 境外生產 (1) Which country has a higher relative wage for high-skilled labor? If offshoring is possible, which country do you expect to specialize in high-skill-intensive activities and which country in low-skill-intensive activities? Solution. The relative wage for high-skilled labor in Morocco and France are respectively given by4 and3. If ofishoring is possible, France is expected to specialize in high-kill intensive activities and Morocco in low-skill intensive activities since (2) Suppose that there are offshoring costs T. For any activity with skill intensity o, what is the unit cost of production for a French company in France? What is the unit cost of production for a French company offshoring the activity to Morocco? Solution. The unit cost of production for a French company in France can be calculated as the unit cost of producing activity with skill intensity a is: C(a)-awH+(1-a)wL C (a)-aul(1-a)u =9a+3(1-a) The unit cost of production for a French company offshoring the activity to Morocco can be calculated as follows: TCM (a) _ T (ou, + (1-0) 2) - T(8o+2(1 - a)) -T (Ga +2) When offshoring costs T unit cost of oehhorineT.(aw114(1-a)sL) (3) Assume T-Ifa-, will a French company choose to perform the activity in France or offshore it to Morocco? If a will a French company choose to perform the activity in France or offshore it to Morocco? Explain. Solution. Using values from (2), we have the following: 20 6.667 35 11667 Since C () TCM (a). That is, c"(a) > TCM (a) 2T-3 (5) Now suppose the offshoring custs fall to T- What is the new unit cost of production for a French company offshoring the activity to Morocco? Solve for the new threshold of a belovw or above which all activities will be offshored by French companies Solution. The French company will offshore the an activity α to Morocco if CF(a) > CM (a). That is, 6 As a result, activities with o e (0.3) will be offshored to Morocco. 由5/3下降到43(offshoring cost) (6) How does this reduction in offshoring costs affect the relative demand for high-skilled labor in France? In Morocco? What will happen to the skill premium in France? In Morocco? llustrate the effects graphically Solution. The reduction in offshoring costs leads to fewer low-skill-intensive activities being performed in France, so the relative demand for high-skilled labor goes up. The reduction in offshoring costs leads to more high-skill-intensive activities being performed in Morocco, so the relative demand for high-skilled labor goes up. As illustrated in the graphs below, this leads to an increase in the skill premium in both countries. France Lw /L

Answer 1

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