Pugel_14_SG_AKEY - ANSWERS Chapter 2 True/False 1. False:...

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ANSWERS Chapter 2 True/False 1. False: consumers of the exported good lose as its price increases. 2. True. 3. False: producers of the domestic import-competing good see lower prices for their goods. 4. True. 5. True: but both are rare at times! Multiple Choice 1. A 2. A 3. C 4. A 5. C Problems 1. a. The equilibrium price of bread in Leinster is 0.6 telephones per loaf; in Saxony the price is 0.2 telephones per loaf. b. Yes. Since Saxony’s bread price is lower than Leinster’s, there will be an incentive for Leinster bread consumers to buy Saxon bread. Saxon bread producers have an incentive to sell in Leinster, where the price is higher. c. Figure 2.1c d. The equilibrium trade price must be the same in both countries (that’s why it is the price at which they trade with each other): it is 0.25 telephones per loaf. Notice that this is the price at which import demand from Leinster equals export supply from Saxony. e. At the trade price of 0.25 telephones per loaf, excess demand for bread in Leinster equals 80 million loaves—exactly the amount of excess supply in Saxony at the trade price. f. Looking at Figure 2.1, consumer gain in Leinster = a + b + c, where producer loss in Leinster = a; consumer loss in Saxony = d; and producer gain in Saxony = d + e. g. Bread consumers in Leinster and bread producers in Saxony will be happy about the opening of 149
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free trade. However, Leinster bread producers will not be happy (they are undercut by cheaper imported Saxon bread), nor will Saxon bread consumers, who used to pay a lower price before the people in Leinster were able to buy the bread. h. The net gain to Leinster is the area labeled “L”; this is equal in magnitude to the net gain b + c from the domestic graph. The net gain to Saxony is the shaded area labeled “S”; this is equal in magnitude to the net gain e from the domestic graph. i. The country with the less elastic trade curve (usually the result of less elastic domestic supply and demand curves) will gain the most from trade. In our case, this is Leinster. It was able to “drive” the price it pays for bread far below its previous domestic bread price. As a percentage of the free-trade price, Leinster’s price for bread changed 140 percent, whereas in Saxony the price changed only 20 percent. j . The losses from closing trade would just be the net gain the countries had obtained from free trade: “L” in Leinster, “S” in Saxony. 2. With more elastic domestic supply and demand curves, Leinster’s import demand curve will also become more elastic. Using Figure 2.1c as a guide, you can see that, as a consequence of an increase in elasticity, the international price of bread will rise, and be closer to Leinster’s pre-trade price. The quantity of bread traded will rise; Leinster’s net gains from trade will fall, but Saxony’s gains will rise. 3.
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This note was uploaded on 02/18/2010 for the course ECON 343 taught by Professor Dblack during the Fall '09 term at University of Delaware.

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Pugel_14_SG_AKEY - ANSWERS Chapter 2 True/False 1. False:...

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