Problem set 2wA

Problem set 2wA - < 2nd Problem Set: Answer Key > E...

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< 2 nd Problem Set: Answer Key > E 101: International Trade 1. Assume that Chile produces 2 commodities, tin and food. Examine the impacts of Chilean biased growth in the production tin on the social welfare . i) First examine the case where there is no change in terms of trade [(P tin /P food ) I ]. O If there is no change in terms of trade even after the biased growth in the production of tin in Chile, it means that Chile is a small economy in the production of tin. In this case, the biased growth in tin production improves the Chilean social welfare (from U 1 to U 2 ) because the expansion of PPF (production possibility frontier) caused by the biased growth expands the CPF (consumption possibility frontier) without any change of the CPF’s slope as shown in the following diagram. U 1 U 2 U 2 U 1 1
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ii) Examine the case where TOT (terms of trade [(P tin /P food ) I ] ) has deteriorated after the biased growth in the production of tin. O In case TOT is deteriorated due to the biased growth of tin production, then the slope of CPF is changed and can intersect with the earlier CPF. Therefore, depending on the utility preference system, the welfare level after the biased growth might be deteriorated as shown in the following diagram. 2
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iii) If the price elasticity of demand on tin is very low in world market, what is the welfare impact of biased growth in the production of tin? [* Explain using diagrams in all three questions above] O If the price elasticity of demand on tin is very low in the world market, the biased growth in the production of tin might cause a larger decrease of TOT, and as a result, the welfare level will be lowered further. - As the elasticity of demand is decreased (i.e., as RD
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Problem set 2wA - &lt; 2nd Problem Set: Answer Key &gt; E...

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