Problem Set 5


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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business FBE 462 – International Trade & Commercial Policy Problem Set #5 1. Consider the example of pollution shown in the figure below. Suppose that the marginal social side cost of pollution is $0.05 per ream produced (instead of $0.30). a. With this different MSSC, does free trade make the country better off or worse off? b. To gain the most from trade, should the country export or import paper? How much? FBE 462 Problem Set #5 2. Assume that the production of cement also produces a substantial amount of air pollution and that a technology is available that can lower the pollution but with somewhat higher production costs for the cement. Because of the availability of raw materials in Lindertania, it produces large amounts of cement, and it exports supply most demand in Pugelovia. But the air pollution from Lindertania’s production blows into Pugelovia, causing a noticeable deterioration in Pugelovia’s air quality. Although Lindertainia suffers some harm itself from this air pollution, it does not now have any policy to reduce the pollution. The Pugelovian government wants to address this air pollution problem. a. If the two countries’ governments cooperate, what is the best solution to address the problem? Explain. b. If Pugelovia must come up with a solution on its own, what should be the Pugelovian government do? Explain. 3. You are an adviser to the government of a country whose exports are mainly a few primary products and whose imports are mainly manufacturing products. You are asked to prepare a short report on the forces that are likely to drive the country’s terms of trade during the next two decades. What will the main points of your report be? 4. Consider the labor-market effects of migration shown in the figure below. What is the effect of a decrease in the annualized cost of migration (a decrease in c) on each group? 2 FBE 462 Problem Set #5 5. Referring again to the figure above, why do the migrants gain only areas e and f? Why don’t they each gain the full southern wage markup ($3.20-$2.00)? Why don’t they each gain ($5.00-$2.00)? 6. “Sending countries should cheer for emigration because the migrants improve their economic well-being”. Do you think this statement is true or false? Why? 3 ...
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