exam2003 - Exam ARE 201 Fall 2003 Attempt to answer all...

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Exam ARE 201 Fall 200 3 Attempt to answer all questions. Your answers should be short. Each question shows the number of points that the question is worth. 1.(35 points) Use a two-commodity model, with food and cloth; put food on the horizontal axis of any graph that you draw. Cloth is the nu- meraire good. Measure welfare using indi f erence curves of the representative consumer. Provide a brief explanation of your answers. Consider a small country. At the initial world price p w this country imports food and exports cloth. (a) Suppose that there are no taxes or any other distortion. Is the welfare e f ect of an exogenous large increase in the world price of food positive, negative or ambiguous? (b) Now suppose that the country taxes domestic production of food. The ad valorem tax is τ , so the domestic producers’ relative price of food is (1 τ ) p w . Consumers face the world relative price. The tax τ is constant.
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exam2003 - Exam ARE 201 Fall 2003 Attempt to answer all...

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