International Econ

timer Asked: Dec 7th, 2015

Question description

  1. Assume a large world economy with several countries. There is a good that can be produced domestically by every country in the absence of trade. Suppose Country 1 has the following demand and supply curves for this good: D1 = 28 − 2P and S1 = 2P − 4. For the rest of the world (without Country 1) demand and supply curves are Dw−1 = 500 − 25P and Sw−1 = 100P . Answer the following questions (where necessary, round to two decimal places).

    1. (a)  If Country 1 initially does not trade with the rest of the world, what are its equilibrium price and quantity?

    2. (b)  Find consumer surplus for Country 1 when it does not trade.

    3. (c)  Show why Country 1 will become an importer of the good, once we allow international trade.

    4. (d)  With free international trade what are the world price and quantity Country 1 imports?

    5. (e)  After intensive lobbying efforts domestic producers in Country 1 get some protection in a form of $1.00 tariff. What are the domestic price in Country 1 and price on the world market?

    6. (f)  How do imports of Country 1 change? By how much?

    7. (g)  By how much does consumer surplus change as a result of tariff?

    8. (h)  What is the net effect of the tariff on Country 1?

    9. (i)  Would you recommend for Country 1 to repeal the tariff? Why or why not?

  2. Consider a good that is produced by an industry characterized by monopolistic competition. At the beginning there are two separate markets with annual sales 1.08 billion and 1.92 billion units, respectively. The sensitivity parameter of individual firm’s demand to price changes is 1/150; fixed costs are 500 million; and marginal cost is constant at $12,000 per unit. Using this information and your knowledge of monopolistic markets, answer the following questions.

    1. (a)  In absence of international trade, how many firms are operating in each market?

    2. (b)  What are the respective prices for consumers in each market?

    3. (c)  How many firms will operate in the integrated market under international trade regime with no trade costs?

    4. (d)  What will be the price in the integrated market?

    5. (e)  Is lower price the only benefit of the integrated market to the consumers? Explain.

    6. (f)  As stated above, the problem assumes that all firms have the same technology. In reality, this is not true. Explain how one can easily modify the problem in order to consider the scenario when when firms have different production technologies.

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