midterm2-eco101-10

midterm2-eco101-10 - Name: Student ID: Economics 101 Fall...

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Unformatted text preview: Name: Student ID: Economics 101 Fall 2010 International Trade Second Midterm Exam November 9, 2010 Time: 70 minutes Total score: 70 points Carefully read the instructions of each question. Words in bold indicate that you need to respond to the request or question. Whatever you answer, also provide a brief explanation. Permissible objects during the exam: pencils, pens, one ruler, one eraser. All other objects must be outside your immediate reach at all times during the exam. 1 Name: Student ID: 1 Intra-industry Trade and Policies: 10 minutes Consider an Intra-industry Trade model. Varieties of the goods are produced under economies of scale but with constant marginal cost c . P Varieties P r i c e n P= / bn +c 1 ( ) F S / 1 P F/S n +c= =( ) AC c Explain in one sentence what profit maximization implies for the relationship between price and marginal cost. Identify the resulting price-variety relationship (PP) in the figure above. Explain in one sentence why free entry implies that average cost equals price in equilibrium. Identify the average-cost-variety relationship (CC) in the figure above. Now consider a market with higher fixed costs than shown in the diagram. Depict a market with higher fixed costs. Are there more or fewer varieties in this case? Why ? 2 Name: Student ID: 2 Trade with Heterogeneous Firms: 10 minutes Firms are heterogeneous in their marginal cost of production and face a linear demand system under monopolistic competition. There are two countries, home and foreign. There are four ideas for home firms with marginal costs c 1 = 25 ,c 2 = 30 ,c 3 = 35 ,c 4 = 70 . There are four ideas for foreign firms with marginal costs c * 1 = c * 2 = c * 3 = c * 4 = 25 . The two countries are initially closed to trade. Under the linear demand system, the break-even condition for a home firm i to enter in the domestic market is equivalent to c i 120 n + c- 25 , where n is the number of active firms in the domestic market, and...
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midterm2-eco101-10 - Name: Student ID: Economics 101 Fall...

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