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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA
Marshall School of Business
FBE 462 – International Trade & Commercial Policy Problem Set #1
1. Which one of the following is not implied by the Mercantilism?
a. Trade is a zero-sum game.
b. Export but not import contributes to national welfare.
c. Policies to restrict import are necessary.
d. A nation gains from trade by importing those goods in which it has the least comparative
2. Which one of the following could be the main explanation of why U.S. exports chicken feet to
a. Production of chicken feet has increasing returns to scale.
b. China is not endowed with resources for producing chicken.
c. Chinese labor cost of producing Chicken is too high.
d. Demand for chicken feet in China is higher than in U.S.
3. The terms of trade of a country is
a. a ratio of its export price index to its import price index.
b. a ratio of its import price index to its export price index.
c. a ratio of its wage to its price index.
d. its opportunity cost of production. FBE 462 Problem Set #1 1. In 2000, the demand and supply of oil in the United States are given by:
Demand: P = 92 – 10 QD
Supply: P = 0.5 + 8.5 QS
where the quantity Q is in billions of barrels the price P is in dollars per barrel.
a. With free trade and an international price of $26 per barrel, how much oil does the
United States produce domestically? How much does it consume? Show the demand
and supply curves on a graph and label these points. Indicate on the graph the
quantity of U.S. imports of oil.
b. If the United States stops all imports of oil (in a way that allows enough time for
orderly adjustments as shown by the equations), how much oil would be produced in
the United States? What would be the price of oil in the United States with no oil
imports? Show all of this in your graph.
c. If the United States stops all oil imports, which group(s) in the United States would
gain? Which groups would lose? As appropriate, refer to your graph in your answer. 2. Consider the following Figure that shows free trade in the market for motorbikes. Assume that consumers in the United States shift their tastes in favor of motorbikes. What is
the effect on the U.S. domestic demand and/or supply curves(s)? What is the effect on the
U.S. demand-for-imports curve? What is the effect on the equilibrium international price? 3. Consider again the above graph. Assume that U.S. productivity in producing motorbikes
increases. What is the effect on the U.S. domestic demand and/or supply curves(s)? What is 2 FBE 462 Problem Set #1 the effect on the U.S. demand-for-imports curve? What is the effect on the equilibrium
international price? 4. Consider two countries: Country I and Country II. Country I has the usual demand and
supply curves for candy bars. Country II has a typical demand curve too, but it cannot
produce candy bars.
a. Use supply and demand curves for domestic markets and for the international market.
Show in a set of graphs the free-trade equilibrium for candy bars. Indicate the
equilibrium world price. How does this world price compare to the no-trade price in
Country I? Indicate how many candy bars are traded during each time period with
free international trade.
b. Show graphically and explain the effects of the shift from no trade to free trade on
surpluses in each country. Indicated the net national gain or loss from free trade for
each country. 3 ...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.