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examkey2002 - Exam AREP 201 Fall 2002 Attempt to answer all...

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Exam AREP 201, Fall 2002 Attempt to answer all questions. All questions have equal weight. Your explanations should be brief and to the point. In some cases it helps to use a theorem to sharpen your explanation. The role of the theorem must be clear, but you do not need to prove the theorem. Where you use graphs be sure to label the axes. 1. An undistorted economy moves from autarchy to free trade. World prices di ff er from autarchic prices. State and explain the e ff ects of this change on the real return to labor in: (i) the Ricardian model, (ii) the H-O-S model, and (iii) the Ricardo-Viner (sector-speci fi c factors) model. 2. Use a two-commodity two-country trade model. (i) Explain why there may be multiple competitive (free trade) equilibria. (ii) Explain what is meant by a “stable equilibrium”. (iii) Explain how the stability assumption is used in comparative statics experiments. 3. Consider a two-commodity two-factor (capital and labor) H-O-S model. A small country imposes a fi xed tari ff ; there are no other distortions. The country receives a gift of capital from a foreign donor. Give a necessary condition for this gift to lower the recipient’s welfare. Give a su cient condition. (Explain.) 4. Use a partial equilibrium model. A small country imports corn. The import of corn creates a negative externality for the importing country of $ γ per unit of imports. (There are no other distortions.) (i) What is the fi rst-best policy? (Tell me the type of policy and the level of the fi rst best policy.) (ii) Suppose that the only available policy instrument is a production policy. Should corn production be taxed or subsidized? Determine the optimal production tax/subsidy and compare to the level of the fi rst best policy.
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