160A: International Microeconomics Final Exam: Professor Swenson March Points

Transcription

1 Name: ID#: 160A: International Microeconomics Final Exam: Professor Swenson March Points 1. The Ricardian Model and Trade [25 points: 4 points for each part, except 5 for d)] Part I: Suppose that the US and the Netherlands have the following unit labor requirements: Bicycles Locks US 50 5 Netherlands a) Which country has comparative advantage in bicycles? b) Describe the possible relative price for bikes to locks (Pb/Pl) when there is trade. Part II The following diagram describes the Ricardian Trade framework for a home and foreign country. The two products are pottery (p) and sportswear (s). Assume that the home country has comparative advantage in the production of sportswear c) What product or products does Home produce in the trade equilibrium displayed above? Q Q p s + Q + Q * p * s d) Suppose that new technologies reduce home's unit labor requirements for sportswear. Modify the curve(s) in the diagram to represent this technology change.

2 Part III: The unit labor requirements and labor forces for home and foreign are the following: Suppose that during free trade home and foreign are completely specialized and the price of rubber to cement is 4. rubber cement Labor Force Home Foreign e) Provide the generic formula for relative wages [w-home/w-foreign] under the scenario of complete specialization. f) Rewrite your formula for relative wages [w-home/w-foreign] replacing the generic notation from part a) with the numbers that apply in this example. 2. Specific Factors and Trade [10 points: 5 points per part] The picture below shows the specific factors diagram for New Zealand. There are two industries: hoses (h) and metal (m). The move from no trade to free trade results in the shift of VMPLm to VMPLm'. VMPLm' VMPLm VMPLh a) During free trade, how much labor is employed in the Metal idustry? b) Describe the change in metal industry profits caused by the move from no trade to free trade. Your answer needs to refer to the diagram.

3 3. The following diagram shows the endowment and iso-value lines for Taiwan before trade. When Taiwan starts to trade, it will export chemicals, and import textiles. Using this information, and the information in the graph, which of the following statements is true. [5 points] a) When Taiwan begins to trade, it will increase the capital intensity of its production of both chemicals and textiles. b) When Taiwan begins to trade, it will increase the labor intensity of its production of both chemicals and textiles. c) When Taiwan begins to trade, it will increase the capital intensity of its production of chemicals while increasing the labor intensity of its production of textiles. d) When Taiwan begins to trade, it will leave the capital intensity of its production unchanged. e) This question can't be answered if you aren't told whether Taiwan is capital or labor abundant. K * Iso-Value for Chemicals Iso-Value for Textiles L 4. Which statement best describes consumer benefits from free trade when industries are characterized by monopolistic competition: [5 points] a) consumers will always benefit from lower prices and more variety. b) consumers will always benefit if their country has first mover advantage. c) consumers will benefit as long as they work in the export industry. d) consumers will benefit as long as they work in the import-competing industry.

4 5. The Standard Model of Trade [ 15 points: 5 points per part ] Consider the standard model of trade. The following diagram represents Taiwan's production and consumption choices. Fill in the blanks, as you interpret the diagram. Watches Coats a) Does Taiwan import or export watches? b) How many watches does Taiwan {import or export}? c) Suppose that the relative price of coats to watches (Pc/Pw) rises. Add a new trade price line in your diagram that represents this change in world prices. 6. Trade Blocks [15 points: 3 points per statement] Label each statement as True or False [T or F] Economic unions often have local content requirements while free trade areas do not. Trade diversion represents the shifting of consumer purchases away from domestic firms, towards imports. Trade creation has two benefits for the economy: one related to increased consumer surplus, the other related to reduced production inefficiency. While trade blocks are allowed under WTO rules, they contradict the principle of "Most Favored Nation" status. If the formation of a trade block reduces prices for consumers in the block, then one can conclude that the formation of the trade block yields net benefits for the member countries.

5 7. External Economies of Scale [15 points: a) 3, b) 6, c) 1, d) 5 ] The picture below shows the world market for industrial lasers. Suppose that average costs of production are given for Japan and Taiwan. Assume that Japan entered the industry years ago, while Taiwan is currently not producing, and has never been a producer in the past either. AC J AC T a) Label the axes and unlabeled straight line in the diagram above. b) What is the current market equilibrium. i.e.: what is the market price and quantity sold? c) Will Taiwanese firms be able to enter this market without assistance? d) Explain why or why not. 8. Rate of Effective Protection [10 points: 5 points per part] Suppose that India places a 5% tariff on imported tires. Rubber is used in the production of tires, and imported rubber has a tariff rate of 2%. Tires that sell for 100 Rupees require 25 Rupees of imported rubber. a) Use the information given above to write down the formula for the rate of effective protection for Indian tire makers. b) Suppose the rate of effective protection for Chilean bike producers is 12.3%. The rate of tariff on imported bikes in Chile is 40%. Will Chilean bike producers lobby for free trade? Explain why or why not.

6 9. Dumping: [20 points: 5 points per question] Suppose that the following equations characterize the Swiss pharmaceutical industry. If the Swiss firm sells its medication abroad, it will receive 60 Swiss Francs Swiss Demand Curve P = Q Revenue in Switzerland: Rs = 100Q - Q 2 Cost C = *Q 2 Marginal Cost MC = Q a) Calculate marginal revenue for the Swiss firms' sales in Switzerland. b) What quantity will the Swiss firm sell worldwide (total sales)? c) How many units will the Swiss firm sell in Switzerland? d) How much will the Swiss firm charge its Swiss customers?

7 10. Large Country Problem [ 20 points: 5 points per part ] The following 3 diagrams represent the markets for refrigerators. European Union Argentina a) Using the information given, fill in the details and labeling for the center diagram. b) Using shading in the diagram for Argentina, explain whether free trade helps or harms Argentine Consumers - quantifying the gains or losses associated with the move from no trade to free trade. c) Suppose that Argentina offers an export subsidy on exported refrigerators. Using shading in the diagram for the European Union, explain whether the subsidy helps or harms the European Union as a whole - quantifying the gains or losses associated with the move from free trade to the new subsidy equilibrium. d) Is it possible for a country that is an importer, to use a subsidy to become an exporter? [ Yes or no.]

8 11. Quota - Small Country - Competitive Case [10 points: 5 points per question] Canada decides to implement a quota in its apparel market. Using the quota amount indicated, and adding markings to your diagram as needed, answer the following questions: Sc Quota Pw Sw Dc a) How much will Canadian consumers pay for imported apparel when the quota is put in place? b) How will the quota change the producer surplus earned by Canadian firms compared with free trade? 12. "Identity-Bias" helps to explain why: (5 points) a) tariffs are positive, even when they generally hurt the domestic economy. b) tariffs are levied against developing countries more than against developed countries. c) tariffs are lowered preferentially for members in a free trade area. d) tariffs are levied against developed countries more than against developing countries. 13. It is believed that "loser" industries are more effective at lobbying for tariff protection than are "gaining" industries. Why might this be? (5 points ) a) loser industries will benefit more from a 1% tariff than do gaining industries. b) the median voter is more likely to be sympathetic to "loser" industries. c) loser industries have fewer free rider problems because new tariffs won't spur entry. d) the "loser" industries wouldn't be losers if other countries practiced "fair trade". e) most observers expect "loser" industries to regain comparative advantage.

9 14. Quota - Small Country - Competitive Industry with monopoly firm in the domestic market. [15 points: 5 points per part.] Malaysia decides to place the indicated quota on imported cell phones. In Malaysia, there is a single firm that produces cell phones, though there are many firms outside of Malaysia that can produce cell phones for price Pw. Using the diagram, and adding additional markings as needed, answer the following questions. MC Quota Pw Sw Dm a) When Malaysia implements the quota, how many cell phones will the Malaysian firm produce? b) Label any quota rents in your diagram. c) How large is the "equivalent tariff"?

10 15. Protection and the Second Best [15 points: 5 points per part.] For health reasons, the surgeon general suggests that the U.S. should reduce consumption of cigarettes from Qc (the current level) to Qn ( a new level). When no policies are in place, the domestic industry produces QD. Pw D QD Qn Qc a) How could the U.S. use trade policy to attain the surgeon general's objective? Describe, referring to picture(s). b) How large a health benefit would the trade policy provide? c) Why is trade policy considered to be "second best"? [Explain, using this example, and the diagrams provided.]