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SSI 2005, 160A
Final
Professor Farshid Mojaver
Multiple Choice Part (36 points, 18 questions, 2 points each)
1. The existence of positive externalities due to the impossibility of full appropriability
A.
Supports the conclusions of the Heckscher-Ohlin model.
B.
Rejects the usefulness of government protectionism.
C.
Supports the concept that the government should support only high tech
industries.
D.
Provides support for government protectionism.
E.
None of the above.
2. In the Brander-Spencer model the subsidy raises profits by more than the subsidy because of
A.
The "multiplier" effect of government expenditures.
B.
The military-industrial complex.
C.
The forward and backward linkage effects of certain industries.
D.
The deterrent effect of the subsidy on foreign competition.
E.
None of the above.
3. If firms in an industry are generating knowledge that other firms can use without paying for
it, this industry is characterized by
A.
Social costs that exceed private costs.
B.
Social benefits that exceed private benefits.
C.
Social costs that exceed social benefits.
D.
Private benefits that exceed social benefits.
E.
None of the above.
4. The reason protectionism remains strong in the United States is that
A.
economists can produce any result they are hired to produce.
B.
economists cannot persuade the general public that free trade is beneficial.
C.
economists do not really understand how the real world works.
D.
the losses associated with protectionism are diffuse, making lobbying by the
public impractical.
E.
None of the above.
5. Of the many arguments in favor of tariffs, the one that has enjoyed significant economic
justification has been the
A.
cheap foreign labor argument.
B.
infant industry argument.
C.
even playing field argument.
D.
balance of payments argument
E.
domestic living standard argument.
6. The main redistribution effect of a tariff is the transfer of income from
A.
domestic producers to domestic buyers.
B.
domestic buyers to domestic producers.
C.
domestic producers to domestic government.
D.
domestic government to domestic consumers.
E.
None of the above.
7. It is argued that high-tech industries typically generate new technologies but cannot
fully appropriate the commercial benefits associated with their inventions or
discoveries. If this is true then in order to maximize a countries real income, the
government should
A.
B.
C.
D.
E.
Tax the high-tech firms.
Subsidize the high-tech firms.
Protect the high-tech firms.
Both B and C
None of the above.
8. A problem encountered when implementing an "infant industry" tariff is that
A.
domestic consumers will purchase the foreign good regardless of the tariff.
B.
the industry may never "mature".
C.
most industries require tariff protection when they are mature.
D.
the tariff may hurt the industry's domestic sales.
E.
None of the above.
9. In practice, international labor mobility is
A.
a complete complement to trade flows.
B.
a partial complement to trade flows.
C.
a complete substitute for trade flows.
D.
a partial substitute for trade flows.
E.
None of the above.
10. Multinational corporations
A.
increase the transfer of technology between nations.
B.
make it harder for nations to foster activities of comparative advantage.
C.
always enjoy political harmony in host countries in which their subsidiaries
operate.
D.
require governmental subsidies in order to conduct worldwide operations.
E.
None of the above.
11. The shift of labor-intensive assembly operations from the United States to Mexican
maqiladora may be best explained in terms of a theory of
A.
location.
B.
vertical integration.
C.
horizontal integration
D.
internalization.
E.
None of the above.
12. External economies of scale arise when the cost per unit
A.
rises as the industry grows larger.
B.
falls as the industry grows larger.
C.
falls as the average firm grows larger.
D.
remains constant.
E.
None of the above.
13. External economies of scale
A.
may be associated with a perfectly competitive industry.
B.
cannot be associated with a perfectly competitive industry.
C.
tends to result in one huge monopoly.
D.
tends to result in large profits for each firm.
E.
None of the above.
14. Internal economies of scale
A.
may be associated with a perfectly competitive industry.
B.
cannot be associated with a perfectly competitive industry.
C.
are associated only with sophisticated products such as aircraft.
D.
cannot form the basis for international trade .
E.
None of the above.
15. According to the Heckscher-Ohlin model, the source of comparative advantage is a
country's
A.
B.
C.
D.
E.
technology.
advertising.
human capital.
factor endowments.
Both A and B.
16. The Leontieff Paradox
A. refers to the finding that U.S. exports were more labor intensive than its
imports.
B. refers to the finding that US. Exports were more capital intensive than its imports.
C. refers to the finding that the U.S. produces outside its Edgeworth Box.
D. still accurately applies to today's pattern of U.S. international trade.
E. refers to the fact that Leontieff - an American economist – had a Russian
name.
17. Which of the following statements is the best comparison of the motives for IntraIndustry versus Inter-Industry Trade?
A. Intra-Industry trade is driven by comparative advantage, while Inter-Industry trade
is not.
B. Inter-Industry trade is driven by comparative advantage, while Intra-Industry
trade is not.
C. Both Intra- and Inter-Industry trade are driven by comparative advantage.
18. Which of the following statements is the best characterization of Terms of Trade Effects
from the perspective of the country implementing the following policies?
A. Both tariffs and export subsidies will improve the terms of trade for the
implementing country.
B. Both tariffs and export subsidies will worsen the terms of trade for the
implementing country.
C. Tariffs will harm, while export subsidies will improve the terms of trade for the
implementing country.
D. Export subsidies will harm, while tariffs will improve the terms of trade for
the implementing country.
The Ricardian Model of Trade [12 points, parts 5,6,7&8 2 pts, all the rest 1 point each]
1) Korea has 200 units of labor, while there are 400 units of labor in China. When they
produce, the countries have the following unit labor requirements.
Shoes
Cars
Korea
10
5
China
10
20
1-1) Which country has absolute advantage in Shoe production and why? What about car
production?
Korea has absolute advantage in Cars because her labor productivity in that
sector is higher than that of China. No country has absolute advantage in the
production of shoes.
1-2) In absence of trade, what is the opportunity cost of Shoes (in terms of Cars) in China and
Korea?
Korea
China
OC of Shoes (in terms of Cars)
aLS/aLC
bLS/bLC
10/5 = 2
10/20 = 0.5
1-3) Which country has comparative advantage in Shoe production?
China
1-4) What is the relative price of Shoes in each country before trade?
Autarky PS/PC in Korea = 2
Autarky PS/PC in China = 0.5
1-5) Show that the real wages (in terms of goods) after trade is higher in both countries
1-6) Calculate relative wages for Korea to China after trade WKor/WChina =
WKor/WChina = (bLS/aLC) PC/PS = 10/5 = 2
1-7) Label the graph below carefully (fill for the question marks)
PS/PC
aLS/aLC = 2
Korea
1
bLS/bLC = 0.5
Relative
Supply
Relative
Demand
China
bLC↓→(bLS /bLS)↑
(LChina /bLS)/(LKor/aLC) = (400/10)/(200/5) = 1
1-8) What is the effect of a technological improvement in car production in China? Illustrate
your answer in the graph above. See above graph
Problem 2 [12 points, 4 points each part]
You are employed as an economic advisor of a presidential candidate in the Unites
States. One of the issues you need to take a stand is the threat of Chinese imports to US
manufacturing products. A number of labor unions demand a substantial increase in the
import tariff rates on such products.
a) What is your advice to the presidential candidate and why?
b) How would your advice change if you were employed by a major party in India
given that income distribution is less equal in India and that India imports capital
intensive goods?
c) How would your advice change if you were employed by the government of
China, where income distribution is more equal but most of the enterprises are
state-owned?
Problem 3 (Trade in Perfectly Competitive Markets) [14 points, a, b , c 2 pts each, d 8 pts]
There is a three panel graph below. In the left hand panel are the demand and supply
curves in the Home country for some good Q. In the right hand panel are the demand and
supply curves for the Foreign country for the same good. Both Home and Foreign are
"large" countries.
(a) In the middle panel, draw the import demand (MD) and export supply (XS*) curves
for Home and Foreign, respectively. Be sure to label the curves.
(b) Label the equilibrium world price in free trade as PoW, and indicate quantities
consumed (QD) and produced (QS) in each country, as well as the quantity of good Q
traded (label this Mo).
(c) Suppose that Foreign imposes a specific export tax of $t. Show the new equilibrium
price in Home and in Foreign, plus the new level of good Q traded (label this M1). Also
indicate the new quantities produced and consumed in each country.
(d) Label the areas in the left hand panel. Relative to free trade,
i.
What is change in Home consumer surplus? (write down the area below)
 CS = -[ a + b + c + d ]
ii.

What change in Home producer surplus?

iii.

 PS = a
What is the change in the Home government’s revenue?
 Gov R = 0
iv.
What is the total change in Home’s welfare?

 W = -[ b + c + d ]
Problem 4 (Monopolistic Competition) [16 points, 4 points each part]
Consider the following monopolistically competitive market.
Cost function:
C = F + cQ
Demand function:
Q = S[1/n –b(P- P¯ )]
Where C is total cost, c is marginal cost, F is fixed cost, Q is output, S is market size, n is
the number of firms, b is sensitivity parameter P is price of the good and P¯ is the
average market price charged by competitors.
a) Draw a graph for the following PP and CC curves and give an economic interpretation
each. PP curve: P = c + 1/(bn) and CC curve: P = c + nF/S
AC, P
CC
Curve
PP
Curve
Number of Firms, n
As number of firms increase two opposing happens: on one hand price falls because
of more competition. This is illustrated by the PP curve. On the other hand, as firms
compete for the same amount of resources to produce more verities, cost of
production goes up. This is illustrated by the CC curve.
b) Suppose there are two countries (A, B) that have monopolistically competitive
industries. The two countries have the same costs of production and demand function
given above, where F=32 and c=5, b=1/4. Sales in country A, SA=128 units, Sales in
country B, SB=512 units.
(i) Find the number of firms and the prices charged by firms in each country if there is no
integration.
 128 
n 

 0.25 * 32 
A
0.5
 512 
4, n 

 0.25 * 32 
32


P 5

 0.25 * 128 
A
B
0.5
0.5
8
32


6 , P 5

 0.25 * 512 
B
0.5
 5.5
ii) Find the number of firms and the prices charged by firms in each country if there is
integration. (round the number of firms if it is not an integer)
S  S A  S B  640
 640 
n

 0.25 * 32 
0.5
32


 8.9 , P  5  

 0.25 * 640 
0.5
 5.44
d) Are there any gains from integration? Explain why or why not?
The producers are realizing economies of scale and are able to provide a greater
variety at a lower cost and produce more. Consumers consume a greater variety at
a lower price. Everyone is better off. There are gains from integration for the
world as a whole.
But if all the efficient firms are in one country and production shifts away from
the country with inefficient firms after integration the producers of this country
would obviously lose.
5- A question on Income Distribution [20 points, 2 points each]
U.S. is considering levying a 15 percent tariff on Chinese imports. Analyze the effects of
this policy in the U.S economy in the following table. You may assume that Chinese
exports to U.S. are mostly labor intensive products. So in answering the question consider
IMP import competing (labor intensive sector) and EXP export (capital intensive) sectors
uses Labor and capital in their production. Consider both US and China as small
economies.
Use the following notation:
+
0
A
the variable increases in this step
the variable decreases in this state
the variable does not change
the variable change is ambiguous (i.e. it may rise, it may fall)
Impact
Short Run
Long Run
IMP to EXP Price ratio
+
+
+
Nominal wage in IMP sector WIMP
+
+
+
Nominal wage in EXP sector WEXP
0
+
+
Nominal rent in IMP sector RIMP
+
+
-
Nominal rent in EXP sector REXP
0
-
-
Real wage in IMP WIMP
+
A
+
Real wage in EXP sector WEXP
-
A
-
Real rent in IMP sector RIMP
+
+
-
capital-labor ratio in IMP production
0
-
+