AEM230_Prob_Set__3_Solutions - AEM/ECON 230 International...

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1 AEM/ECON 230 Prof. David Lee International Trade and Finance Fall 2007 Problem Set #3: Updated Solution Key Question 1: Effective Tariff, Tariff Escalation and Bound Tariffs [16 points] Chile, Malaysia and Switzerland produce chocolate bars using cocoa and labor. In each of the three countries, domestic labor and imported cocoa account for respectively 30 percent and 70 percent of total production costs. Import tariffs on cocoa and chocolates are presented in Table I. Table I: Import Tariffs on Cocoa and Chocolates in Chile, Malaysia and Switzerland Product Chile’s Import Tariffs Malaysia’s Import Tariffs Switzerland’s Import Tariffs Cocoa 6 percent 6 percent 0 percent Chocolate 6 percent 9 percent 5.7 percent a. Calculate the effective tariff on chocolates in each country. [9 points] 06 . 0 ) 7 . 0 1 ( ) 06 . 0 * 7 . 0 ( 06 . 0 1 = - - = - - = a ab n E Chile 16 . 0 ) 7 . 0 1 ( ) 06 . 0 * 7 . 0 ( 09 . 0 1 = - - = - - = a ab n E Malaysia 19 . 0 ) 7 . 0 1 ( ) 0 * 7 . 0 ( 057 . 0 1 = - - = - - = a ab n E d Switzerlan Where: E is the effective tariff on chocolates; n is the nominal tariff on chocolates; a is the share of imported cocoa in total chocolate production costs; b is the nominal tariff on cocoa. b. Which country(ies) affords the lowest and highest levels of nominal protection to domestic chocolate producers? Which country(ies) affords the lowest and highest levels of effective protection to domestic chocolate producers? [4 points] Switzerland affords the lowest level of nominal protection to domestic chocolate producers. Malaysia affords the highest level of nominal protection to domestic chocolate producers. Chile affords the lowest level of effective protection to domestic chocolate producers. Switzerland affords the highest level of effective protection to domestic chocolate producers.
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2 c. Suppose that labor costs increased in Malaysia. Domestic labor now accounts for 50 percent of total chocolate production costs (imported cocoa accounts for the remaining 50 percent). What is the new effective tariff on chocolates? [3 points] 12 . 0 ) 5 . 0 1 ( ) 06 . 0 * 5 . 0 ( 09 . 0 1 ' = - - = - - = a ab n E Malaysia Question 2: QUOTA vs. TARIFF [40 points] 1. The Republic of Cape Verde produces and consumes peanuts and is a “small” trading country in the international peanut market. Its demand and supply for peanuts are characterized by the following equations: Demand: P = 600 – 3/4 Q Supply: P = 100 + 1/2 Q where Q equals quantity of peanuts (in bushels) and P equals price (denominated in Escudos, the local currency). Assume the world price for peanuts is 150 Escudos per bushel. a)
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AEM230_Prob_Set__3_Solutions - AEM/ECON 230 International...

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