Homework_5-07 answers - Econ 171-EEP 151 Fall 2007 Alain de...

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Econ 171-EEP 151 Alain de Janvry Fall 2007 Homework #5 Preparing for the final examination Due December 6, 2007 Class #15. Trade 15.1. Using a subsidy (under EOI) can give equal incentives to producers but it is less distortive and more expensive for the state than using a tariff (under ISI). T/F______ and explain why. (Hint: Work your way through the producer-consumer surplus exercise for an import tariff used for ISI in Handout #12, Figure 2. Apply the methodology to a subsidy under EOI, Figure 4 in the handout). True. With EOI consumers do not get hurt since the price does not change, consumer surplus does not change, however, the state has to pay for the subsidies, so it is more expensive for the state. Class #16. Real exchange rate 16.1. ISI appreciates the RER and is good for agriculture. T/F______ and explain why. False, ISI does appreciate the RER since it decreases the amount of imports which will cause a decrease in dollars demanded. However, an appreciation of the RER means that the ratio P T / P NT decreases so P T decreases relative to P NT. The impact on agriculture and other tradable sectors which are not protected is a strong disprotection through: 1) higher industrial input costs and 2) production of tradeable goods decreases relative to non-tradeables(since relative price of tradeable decreases) and there is an increase in the imports as a consequence of RER appreciation. A policy to mitigate the effect of ISI on agriculture will be to invest in technological change in agriculture to lower Average Costs and make it competitive in spite of disprotection. 16.2. If China revalued (appreciated) its currency this would help the US reduce is balance of trade deficit. T/F______ and explain why. True. If China appreciates its currency then its imports would increase and its exports would decrease. In terms of bilateral trade, US goods become relatively cheaper, this would help the US reduce it balance of trade deficit because it would mean less China products coming into the US. Class #17. Aid and targeting 17.1. Extra marginal food transfers allow individuals to allocate their budget between food and other goods such that their utility is always maximized. T/F______ and explain why. False. We call extra marginal to a food transfer that is greater than the individual’s desired food consumption after income effect. This transfer would allow the individual to maximize its utility only if a secondary exists and the transaction costs are zero.
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Homework_5-07 answers - Econ 171-EEP 151 Fall 2007 Alain de...

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