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final-eco101-03 - Name Student ID Economics 101 Fall 2003...

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Name: Student ID: Economics 101 — Fall 2003 International Trade Final Exam December 8, 2003 Time: 120 minutes Total score: 120 points 1 Endowment Changes, Trade and Incomes: 10 minutes Home and Foreign produce two goods each, cars and food, and draw on three factors. Cars are produced using capital K and labor L C , but no land. Food is produced from land T and labor L F , but without capital. Labor is completely mobile between sectors ( L C + L F = ¯ L ). No factor can cross borders. Consider the Home country. Draw a diagram that shows labor demand, the wage rate and the labor allocation between sectors for Home. [You may assume any relative world price P C /P F for cars.] Foreign accumulates capital faster than Home so that the world price of cars drops to a level P 0 C < P C . [You may assume that P F remains constant.] How does this affect the Home labor allocation to the car sector? How does a drop in car prices to P 0 C < P C affect the rent of capital and land owners at Home? 1
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Name: Student ID: 2 Trade and Tariffs: 10 minutes Consider a Standard Trade model. Comparative advantage may stem from productivity or endowment differences. There are two goods: Cloth and food. The figure below depicts a trade equilibrium in the absence of tariffs and subsidies. Home imposes a tariff on food. There is no direct intervention in cloth markets. Using the figure below, depict graphically the relative price of food for the production sector at Home ( P 0 F /P 0 C ) when tariffs are imposed. Indicate the new product mix at Home. Home is a small country and its tariff has no effect on world prices. Using the figure below, depict graphically the trade line ( isovalue line ), along which the Home country can trade on the world market in the presence of food tariffs. Does Home gain in welfare terms from sheltering its farmers? Might your answer to the preceding question change if Home is a large country?
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