Homework 7 35-39 - 1 Homework 7 Submitted by...

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Unformatted text preview: 1 Homework 7 Submitted by deweerdt@msu.edu on 10/15/2008 3:59:36 PM Points Awarded 11 Points Missed 0 Percentage 100% 1. Consider a country that is a small importer of cars. In the absence of any restrictions, the country would import 50,000 cars at the world price of $20,000 per car. Now suppose that this country implements a quota, restricting imports to 32,000 per year. In response, the price of cars within this country increases to $42,000. What is the value of quota rent in this example? A. $20,000 * 50,000 B. $42,000 * 32,000 C. $22,000 * 32,000 D. $22,000 * 18,000 E. $42,000 * 18,000 Quota rent is represented by the quota-induced price increase ($42,000 - $20,000) multiplied by the amount of imports permitted under the quota (32,000). So, quota rent in this example is $22,000 * 32,000. The answer can be illustrated in a supply and demand diagram. In this diagram, we know the original amount of imports and the restricted amount. We also know the free trade price, as well as the domestic price when there is a quota. Quota rent is represented by the shaded rectangle. 2 Points Earned: 1/1 Correct Answer: C Your Response: C 2. "Quality upgrading" is a likely result from implementation of A. an import tariff. B. an export subsidy. C. a voluntary export restraint. With a voluntary export restraint, the quantity of exports is limited. Without any limitations, firms would export any variety that is profitable. With limitations in the quantity of exports, exporters are likely to choose to export only their "top end" models, since profit margins on these models are generally higher than on their lower-end varieties. Points Earned: 1/1 Correct Answer: C Your Response: C 3. Suppose that Mexico is a small exporter of beans. Further suppose that the world price of beans is $6 per bushel, and that the Mexican government offers farmers an export subsidy of $2 per bushel. The relevant domestic (Mexican) demand and supply diagrams are illustrated in the 3 following diagram: With the export subsidy, how many bushels of beans would Mexican farmers export? A. 17 B. 15 C. 9 D. 7 E. 2 The quantity of exports is measured by the difference between domestic supply and domestic demand, evaluated at the subsidy-inclusive price. In this case, the subsidy-inclusive price is $8, which is the free-trade price plus the $2 subsidy. 4 Points Earned: 1/1 Correct Answer: B Your Response: B 4....
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This note was uploaded on 02/25/2011 for the course ECON 340 taught by Professor Leidholm during the Spring '08 term at Michigan State University.

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Homework 7 35-39 - 1 Homework 7 Submitted by...

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