Problem Set 2


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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business FBE 462 – International Trade & Commercial Policy Problem Set #2 1. If production of firm involves a fixed cost, then a. there exists internal economies of scale. b. there exists external economies of scale. c. there exists constant returns to scale. d. there exists decreasing returns to scale. 2. With increasing returns to scale and transaction costs, a. a firm will likely locate its production in a smaller market. b. a firm will likely locate its production in a bigger market. c. a firm will be indifferent in locating its production between the smaller or bigger markets. d. a country with a higher demand for a good will likely be an importer of this good. 1. Consider a world of two countries, Tobleronia and Pretzelvania. There are two commodities that can be produced, beer and chocolates. Labor is the only factor of production. In Toblerenia, one person in one year can produce 4 thousand boxes of chocolate or 8 thousand cases of beer. In Pretzelvania, one person in one year can produce 6 thousand boxes of chocolate or 15 thousand cases of beer. A. B. In which commodity does Pretzelvania have a comparative advantage? Explain. What does this indicate for the free-trade equilibrium? C. When trade is opened up, what are the limits to the equilibrium ratio of the price of chocolate to the price of beer? Explain. D. 2. Which country has an absolute advantage in beer? In chocolate? Suppose that a few years after the opening of trade, Tobleronia develops a new process (useful only in Tobleronia), that enables one person in one year to produce 12 thousand cases of beer. What will happen to the pattern of trade? Explain briefly. A small country exists initially, with no international trade, as shown in the attached graph. The country produces both cheese and robes, and it consumes both cheese and FBE 462 Problem Set #2 robes. With no trade, production and consumption are both at point A. Now trade is opened with the rest of the world, and the country can trade at a world relative price of robes that is lower than the country’s no-trade relative price. In your answers, use our usual assumptions for two-product analysis, unless otherwise stated. Specifically, both goods are normal in consumption. A. Assume that the country cannot change its production point (notwithstanding the ppc shown), perhaps because there is no ability for resources to move between industries of employment. Show graphically and explain that the country gains from trade (even if the production point remains at A). 2 FBE 462 Problem Set #2 B. For the shift from no trade to free trade that you show in question A, which of the following is possible? the quantity of robes consumed increases the quantity of robes consumed decreases the quantity of cheese consumed increases the quantity of cheese consumed decreases. C. Now, the country gains the ability to adjust its production point as well (perhaps because resources do become mobile between industry of employment). Assume that the world price ratio is the same as the one you used in your answer to question A. Compared to the no-trade situation, does the country gain more or less from trade, compared to your answer to question A? Show this graphically and explain. 3. True, false, or uncertain, and explain why. A) E) In a Ricardian analysis of trade patterns, a country exports products for which its labor productivity is higher than the labor productivity in the foreign country. According to the Ricardian approach to trade, if in Puglia one worker in one year can produce either 50 bowls or 8 chairs, and in Choiland one worker in one year can produce either 80 bowls or 16 chairs, then Choiland will export bowls with free trade. According to the Heckscher-Ohlin theory, a country that has more farmable (arable) land than any other country in the world will export agricultural products. With free trade the rental returns to a hectare of land (of the same quality) will be the same in different countries, even if one country is land-abundant and the other country is land-scarce. Free trade makes owners of land and capital better off, and workers worse off. 4. Define each term. Explain its significance in international economics. B) C) D) A. Heckscher-Ohlin theory of trade patterns B. Intraindustry trade 3 FBE 462 Problem Set #2 Graph for Question 2 Cheese A Country Indifference curve Robes 4 ...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.

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