Problem Set 4


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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business FBE 462 – International Trade & Commercial Policy Problem Set #4 1. Consider the export subsidy shown in the figure below. Assuming that the export subsidy remains $20, what are the effects of a decline in the world price from $100 to $90? Show the effects using a graph and explain them. That is, you have to describe the changes in quantities and in surplus for consumers, producers and government. 2. Consider the case on an export subsidy for an importing country that has some monopsony power, that is, the country is a large economy and it can affect the world price. The foreign supply-of-exports curve is upward-sloping. Use a graph as the one in Figure 10.4 in the book (page 232). a. In comparison with free trade, what is the effect of the export subsidy on the international price and the quantity traded? b. The importing country now imposes a countervailing duty that returns the market to the initial free-trade quantity traded. In comparison with the market with just the export subsidy, explain why the countervailing duty can also increase the well-being of the importing country. 3. Draw the diagram corresponding to the Figure below for an embargo on imports from the targeted country. Identify the losses and gains to the embargoing countries, the target country, and other countries. Describe what values of elasticity are more likely to give power to the embargo effort and what values of elasticities are more likely to weaken it. FBE 462 Problem Set #4 4. What kinds of countries tend to use economic embargoes? Do embargoes have a greater chance of succeeding if they are applied gradually rather than suddenly? 5) The following condition must be satisfied in order for the dumping to occur: a) The domestic and foreign markets must be integrated. b) The producer faces perfect competition in the domestic as well as in the foreign markets. c) The elasticity of demand is higher in the domestic market than in the foreign market. d) The elasticity of demand is lower in the domestic market than in the foreign market. 6) Suppose the cost of oil in Mexico is $4.00 per barrel, in the U.S. it is $3.00 per barrel. Suppose Canada has an import tariff of $2.00 per barrel on oil. The price of oil in Canada would be a) $3.00. b) $4.00. c) $5.00. d) $9.00. 2 FBE 462 Problem Set #4 7) Which one of the following would imply the free mobility of labor and capital among the participating countries? a) Free Trade Area b) Custom Union c) Common Market d) WTO participating countries 8) Suppose that Airbus and Boeing are the only two airplane producers in EC and US respectively. If both Airbus and Boeing produce, then both Airbus and Boeing will lose $5.00. If one of them produces but the other does not, then the one produces will gain $100 profit and the other will get zero. If none of them produces, then of course, both will get zero. Assume that Boeing starts producing airplane first. Then a) Airbus will not enter the market. b) Airbus will enter the market and drive Boeing out. c) Both Airbus and Boeing will be in the market to produce airplane. d) Airbus may or may not enter the market. 9) Use the information in problem 8. Suppose the U.S. provides $25 subsidy to Boeing and EC provides $25 to Airbus. Then a) the total real income (welfare) of the world will be $40. b) the total real income (welfare) of the world will be $125. c) the total real income (welfare) of the world will be -$10. d) the total real income (welfare) of the world will be 0. 3 FBE 462 Problem Set #4 10) In the following diagram, D is the Mexican domestic demand. S(KO) is the supply curve of Korea and S(US) is the supply curve of US. Suppose that initially there is a $5 tariff imposed on import. Assume that Mexico does not produce this product. P 15 a 14 b c S(US) d e $10 S(KO) D A B C a. Suppose that Mexico form a Free Trade Area with US. Will Mexico be better (or worse) off? By how much? b. What does this exercise tell you? c. Under what circumstances, a nation is more likely to be better off when joining a Free Trade area? 4 ...
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