160A: International Microeconomics Midterm 1: Professor Swenson October 17, Points VERSION A

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1 Name: SS#: 160A: International Microeconomics Midterm 1: Professor Swenson October 17, Points VERSION A Multiple Choice: The first 20 questions are multiple choice. Each is worth 5 points. The Ricardian Model of Trade The following conditions should be used to help you answer the multiple choice questions 1 to 4. Malaysia has 200 units of labor, while there are 400 units of labor in Indonesia. When they produce, the countries have the following unit labor requirements. Malaysia Indonesia Cameras Rugs MC1) What is the relative price of rugs to cameras in Indonesia if there is no trade? a) 1/4. b) 1/2. c) 1. d) 2. e) 4. MC2) For which product does Malaysia have comparative advantage? a) Cameras. b) Rugs. c) Neither. MC3) Would Malaysia benefit from trade if the world price for rugs to cameras were 1? a) Yes, if it exports rugs. b) Yes, if it exports cameras. c) No. Because the world price is the same as its relative price before trade. d) No. Because Indonesia is worse at making both products. e) It is impossible to tell. MC4) Calculate relative wages for Malaysia to Indonesia assuming incomplete specialization where both countries produce rugs. W M /W I = a) (1/40)/(1/10) = 1/4 b) (1/20)/(1/10) = 1/2 c) (1/10)/(1/10) = 1 d) (1/20)/(1/40) = 2 e) (1/10)/(1/40) = 4

2 The Ricardian Model of Trade (continued) As Before Malaysia has 200 units of labor, while there are 400 units of labor in Indonesia. When they produce, the countries have the following unit labor requirements. Malaysia Indonesia Cameras Rugs Pc/P R Relative Demand MC7 MC5) Suppose that relative demand is at the position shown in the graph above. This indicates that: a) Both countries produce rugs, and one country produces cameras. b) Both countries produce cameras, and one country produces rugs. c) Each country is specialized in its comparative advantage product. MC6) Suppose that relative demand is at the position shown in the graph above. This indicates that the world price of cameras to rugs with trade is: a) 1/4. b) 1/2. c) 1. d) 2. e) 4. MC7) The value of the kink point shown as MC7 on the graph is: a) [200/20]/[400/10] = 1/4. b) [200/10]/[400/10] = 1/2. c) [400/20]/[200/10] = 1. d) [400/10]/[200/10] = 2.

3 e) [400/10]/[200/20] = 2. Ricardian Model with Multiple Goods The following unit labor requirements apply to production by Uruguay and Chile: Uruguay Chile Insulation Grain 3 6 Beef Video Tape 2 8 MC8) Which country has absolute advantage in the production of beef? a) Uruguay. b) Chile. c) Neither. MC9) For which product does Uruguay have greatest comparative advantage? (relative to Chile)? a) Insulation. b) Grain. c) Beef. d) Video Tape. MC10) What is the relative wage (w u /w c ) for Uruguay to Chile when the equilibrium results in both countries are producing Grain? a) 1/4. b) 1/2. c) 1. d) 2. e) 4. General Trade Facts MC 11) Current trade [exports or imports] compared to US National income, is roughly: a) 5 percent. b) 11 percent. c) 30 percent. d) 70 percent. Factors and Trade MC 12) Before trade the relative price of coffee to oil (p c /p o ) is 3 in Nigeria, and 5 in Venezuela. Venezuela is labor scarce compared with Nigeria. Before trade, Venezuela has well-established firms that produce both coffee and oil. Each type of firm has invested in the appropriate type of capital. Using fundamentals from the factor model, is oil labor or capital-intense in production?

4 a) labor-intense. b) capital-intense. c) can't tell from the given conditions. The Specific Factors Model of Trade The following diagram shows Australia's economy before and after trade is opened. There are two industries- Jackets (j) and Machinery (m). w1 w0 VMPL m VMPLj Oj Om Arrow 1 Arrow 2 Arrow 3 MC 13) How Many workers are employed making Jackets before trade is opened? a) Arrow 1. b) Arrow 1 plus Arrow 2. c) Arrow 2. d) Arrow 2 plus Arrow 3. e) Arrow 3. MC 14) Which product does Australia export when trade is opened. a) Jackets. b) Machinery. MC 15) What does the area of the bold triangle represent? a) Profits in the Jacket industry before trade. b) Profits in the Jacket industry after trade. c) Profits in the Machinery industry before trade. d) Profits in the Machinery industry after trade. MC 16) How Many workers are employed making Jackets after trade is opened? a) Arrow 1.

5 b) Arrow 1 plus Arrow 2. c) Arrow 2. d) Arrow 2 plus Arrow 3. e) Arrow 3.

6 MC 17) The "Leontieff Paradox" refers to the finding that U.S. imports were a) not causing factor price equalization. b) less labor-intense than U.S. exports. c) more labor-intense than U.S. exports. d) higher priced than domestic production. MC 18) Which of the following is the most accurate? The specific factors model represents a) the short-run, while the general heckscher-ohlin represents the long-run. b) the long-run, while the general heckscher-ohlin represents the short-run. c) the effects of productivity on trade flows. d) the effects of productivity of capital returns. e) the effects of productivity on labor returns. Use the simple Ricardian diagram for France to answer questions 19 and 20. shoes 15 France 12 MC 19) According to the diagram, when France is trading, it produces: a) 11 socks and 15 shoes. b) 5 socks and 12 shoes. c) 11 socks and 0 shoes. d) 0 socks and 15 shoes. e) 6 socks and 3 shoes. f) 5 socks and 3 shoes Socks MC 20) According to the diagram, when France is trading, it: a) imports 11 socks and exports 15 shoes. b) imports 5 socks and exports 12 shoes. c) imports 5 socks and exports 3 shoes. d) imports 11 socks and exports 3 shoes. e) exports 6 socks and imports 3 shoes. f) exports 5 socks and imports 3 shoes.

7 The Heckscher Ohlin Model of Trade [30 points: 5 points per question] The diagram shows Mexico's economy. Mexico can produce either car parts or dishware. Compared with dishware, car parts are capital-intense. Labor a) What is the label of the y-axis? b) Draw and label iso-quants for the car parts and dishware industries in Mexico using solid lines. c) Suppose that Mexico goes from no trade, to free trade with Cuba. Compared with Cuba, Mexico is capital abundant. Modify your diagram using dashed lines ( ) to show the changes. d) The dot in the diagram shows Mexico's endowment. Using markings on your diagram, describe Mexico's allocation of factors to car parts industries when it is trading with Cuba. e) What happens to Mexican wages when trade opens? (compared with capital returns) f) How can you use the diagram to verify your answer to part e)?

8 Ricardian Trade [6 points] Suppose the manufacturing wage is 7,500 Yen in Taiwan and 10,000 Yen in Japan. Using insights from the Ricardian Model, can you definitively conclude that an electronics firm would hire labor in Taiwan rather than Japan? Yes, or no. [1 points] Why? Provide the intuition for your answer. [5 points] Ricardian Trade [ 4 points] Why are some goods non-traded?

9 Multiple Choice Questions Test Test Version A Version B 1) d) b) 2) b) a) 3) c) c) 4) e) d) 5) b) a) 6) c) b) 7) c) c) 8) b) a) 9) d) c) 10) d) b) 11) b) b) 12) b) a) 13) b) e) 14) b) b) 15) c) c) 16) a) d) 17) b) b) 18) a) b) 19) d) c) 20) c) d) 160A: International Microeconomics Midterm 1 - Fall 2002 Solutions The Heckscher Ohlin Model of Trade The diagram shows Mexico's economy. Mexico can produce either car parts or dishware. Compared with dishware, car parts are capital-intense. a) What is the label of the y-axis? Capital b) Draw and label iso-quants for the car parts and dishware industries in Mexico using solid lines. See Diagram. c) Suppose that Mexico goes from no trade, to free trade with Cuba. Compared with Cuba, Mexico is capital abundant. Modify your diagram using dashed lines ( ) to show the changes. See Diagram. d) The dot in the diagram shows Mexico's endowment. Using markings on your diagram, describe Mexico's allocation of factors to car parts industries when it is trading with Cuba. They use Kcp capital and Lcp Labor

10 e) What happens to Mexican wages when trade opens? (compared with capital returns) Relative wages (w/r) fall, because Mexico is labor scarce and capital abundant. f) How can you use the diagram to verify your answer to part e)? The iso-cost line, which has slope (-[w/r]) has become flatter. This implies that wage costs w have declined relative to capital costs r. Kcp Lcp Labor Ricardian Trade [6 points] Suppose the manufacturing wage is 7,500 Yen in Taiwan and 10,000 Yen in Japan. Using insights from the Ricardian Model, can you definitively conclude that an electronics firm would hire labor in Taiwan rather than Japan? Yes, or no. [1 points] No. Why? Provide the intuition for your answer. [5 points] Firms will be willing to pay the higher wage to hire Japanese workers if the productivity of Japanese workers is sufficiently high to justify the wage premium. Ricardian Trade [ 4 points] Why are some goods non-traded? Although comparative advantage implies a particular direction of trade, the benefits of trade may not be sufficiently large to compensate for tariff barriers or transportation costs that are entailed in exporting. In addition, some products (like haircuts) can't be traded.

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12 Name: #: ID 160A: International Microeconomics Midterm 2: Professor Swenson November 12, Points VERSION A 1. The Standard Model of Trade pens Japan Ppen/Pc Curve A Curve B cameras MC 1) When the production possibility frontier shifts from the initial solid position to the one indicated by the dashed line, it shows: a) Biased growth in Pens. b) Biased growth in Cameras. c) Balanced growth. MC 2) The illustrated change in the production possibility frontier will cause a) Curve A to shift in. b) Curve A to shift out. c) Curve B to shift in. d) Curve B to shift out. MC 3) Suppose that Ppen/Pc were to fall. This would mean that Japan's terms of trade had: a) improved. b) worsened. c) can't tell. MC 4) Suppose Curve B shifts in. This will cause the iso-value line to: a) Shift in. b) Shift out. c) Become flatter. d) Become steeper. e) Do nothing. It won't shift or change slope.

13 2. The Standard Model of Trade Suppose that China can produce cars(c) or appliances(a), according to the production possibility frontier shown below. [In all questions you should assume that China is trading with the rest of the world.] appliances MC 5) How many cars are produced in China? a) 0 b) 15 c) 20 d) 30 e) 35 cars MC 6) Which product does China import? a) cars. b) appliances. MC 7) How many units of that product does China Import? a) 12. b) 15. c) 20. d) 28. e) 35. MC 8) Which of the following is China's terms of trade? a) Pa/Pc b) Pc/Pa c) 35/16 d) 16/35 MC 9) Suppose China's terms of trade worsens. This will cause China to: a) produce more appliances and fewer cars. b) produce more cars and fewer appliances. c) to consume fewer appliances. d) to switch from exporting cars to exporting appliances. e) to switch from exporting appliances to exporting cars.

14 Firms and Industries in International Trade MC 10) External economics of scale imply that an individual firm's a) productivity will increase as its own output rises. b) productivity will increase as output in its industry rises. c) costs will decline as its own output rises. d) costs will decline as output in its industry rises MC 11) The diagram above represents the market for robots - an industry where learning is important. Suppose that Japan enters the industry, producing 50 robots in the first year, and 90 in the second year. At the end of the first two years, Japan's cost per robot will be: a) 200 b) 60 c) 80 d) 90 e) 140 MC 12) The model of monopolistic competition implies that the benefits from trade include: a) increased variety. b) lower prices. c) ability of firms to collude. d) a & b. e) a & b & c.

15 Dumping (Use the following information to answer questions 13-15) The sale of computers is segmented internationally by the use of service contracts. Suppose there is one computer firm located in Argentina. The domestic demand curve for the Argentinean firm is given by { p= q }, and marginal revenue is given by { MR= q }. This firm has a cost function describing total costs C, {C = 100+ (1/2)q 2 }. If the firm seeks out international opportunities for sales it can sell as many units as it wishes at a price of 600 per unit. MC 13) What is the marginal cost for the domestic firm? a) MC = 100+2q. b) MC = 100+q. c) MC = 100+ (1/2)q 2 d) MC = q. e) MC = 2q. MC 14) How many computers will the Argentine firm sell in Argentina? a) 30. b) 40. c) 60. d) 80. e) 100. MC 15) How many computers will the Argentine firm produce? a) 300. b) 400. c) 600. d) 800. e) Tariffs MC 16) When the US imports manufactured items from other countries that are WTO members, the US tariffs are roughly: a) 0%. b) 4%. c) 20%. d) 40%. Standard Model of Trade MC 17) Sweden exports cars to Bangladesh, and imports textiles from Bangladesh. Suppose that Sweden provides 32 billion kroner in aid to Bangladesh. The aid will improve Sweden's terms of trade if: a) Sweden has a higher marginal propensity to consume cars than does Bangladesh.

16 b) Sweden has a lower marginal propensity to consume cars than does Bangladesh. c) Bangladesh starts running a trade surplus with Sweden. d) Bangladesh starts running a trade deficit with Sweden. Small Country Tariff [Use the following diagram to answer questions 18-20] MC 18) When the country has free trade, how many units does it import? a) 3. b) 5. c) 20. d) 25. e) 32. MC 19) According to the picture, how much tariff revenue is collected? a) 15. b) 25. c) 100. d) 200. e) 320. MC 20) Which of the following are consequences of the tariff? a) The tariff causes total consumption to fall from 35 to 5 units. b) The tariff causes the domestic industry to expand from 3 to 5 units of output. c) The tariff causes the domestic industry to expand from 22 to 30 units of output. d) The tariff reduces production inefficiency. e) c & d.

17 External Economies [15 points] a) What are the 3 factors that give rise to external economies? [6 points] Use the following diagram to answer parts b) and c). ). You should assume that Japan is currently producing. D-world AC-Japan AC Korea b) Will Korean firms enter if there is no governmental intervention? [2 points] c) Why or why not? [7 points]

18 Protection [25 points: 5 points per part] Consider the market for watches. Demand Curve Supply Curve China D = P S = 20P Switzerland D* = P S* = 10P a) Derive China's export supply schedule. b) Derive Switzerland's import demand schedule. c) Calculate the world price that occurs with Trade. d) How many watches does Switzerland import if there is free trade? e) How many watches does Switzerland produce if there is free trade?

19 160A: International Microeconomics Midterm 2 Solutions Fall 2002 Multiple Choice Questions Test Test Version A Version B 1) a) b) 2) b) a) 3) b) a) 4) d) c) 5) c) e) 6) a) b) 7) b) a) 8) a) a) 9) b) a) 10) d) d) 11) b) b) 12) d) d) 13) d) d) 14) b) c) 15) c) b) 16) b) b) 17) b) b) 18) e) e) 19) d) d) 20) b) b) External Economies a) What are the 3 factors that give rise to external economies? Knowledge Spillovers Labor Pooling Specialized Suppliers b) Will Korean firms enter if there is no governmental intervention? No. c) Why or why not? [7 points] Even though the Korean industry could produce any particular quantity at lower cost than Japan can, Japan has the first mover advantage. This means that Japan s current cost of producing, is defined by the intersection of the world demand

20 curve and AC_Japan. In Contrast, if a Korean firm were to enter, its cost would be given by the point on the y-axis where AC-Korea begins. Individual firms would not enter, because the new entrants would have higher costs than the established firms in the Japanese industry. Protection Consider the market for watches. Demand Curve Supply Curve China D = P S = 20P Switzerland D* = P S* = 10P a) Derive China's export supply schedule. XS = S-D XS = 20P P XS = P b) Derive Switzerland's import demand schedule. MD = D*-S* MD = P 10P MD = P c) Calculate the world price that occurs with Trade. You find Pw by setting MD = XS Pw = Pw 300 = 60Pw Pw = 5 d) How many watches does Switzerland import if there is free trade? Plug Pw = 5 into Switzerland s MD. MD = *5=50 e) How many watches does Switzerland produce if there is free trade? Plug Pw = 5 into Switzerland s Supply Curve. S* = 10*Pw = 10*5 = 50.