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solutions-midterm2-eco101-09

solutions-midterm2-eco101-09 - NAME STUDENT ID 1 Standard...

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Unformatted text preview: NAME: STUDENT ID: 1 Standard Trade Theory: 10 minutes Consider a standard classic trade model with varying opportunity costs. The production possibility frontier of the Home country is depicted below. o What is the slope of the world trade line, PF/PC or Pc/PF. 5 7/ G o What good does the home country import? (3 Food” 0 Show in the diagram that a. deterioration in the home country’s terms of trade will worsen the home country’s welfare (utility). 7—07— [F 2 x. 6&7?!“ flu. [4 $1? //J¢ Irk Home cloths output Home food output NAME: STUDENT ID: I l 2 Intra-industry Trade: _10 minutes Consider an Intra—industry Trade model. Varieties of the goods are produced under internal economies of scale but with constant marginal cost 0. Contrary to the model in class, suppose that all firms sell at a constant markup over marginal cost. In other words, in equilibrium all firms get to charge a price that is a constant percentage higher than marginal cost, irrespective of the firm’s own scale and the number of competing varieties. 0 Suppose every firm’s constant markup over marginal cost 0 is 50 percent. Depict the price-variety relationship (PP) under this scenario in the diagram below. 3 A I_ 5' c = P - Explain why the average-cost—variety relationship (00) strictly increases in n in equi- librium. #5 mm: ‘Rh’hs Sc// a 3c fflaaafi? 4/ (éfiqy/I’ 7%C, 72er cos?! (5 5/7/20! 626/05.) "Etude!” 1%,»; 5/4 ,Jurayy 3 7% e 6057’: ,4, 0 Suppose market size S doubles compared to the relationship (00) shown in the dia- gram. Depict the new equilibrium price and equilibrium number of varieties. How does “Hare Change? fierce. F( 6214915 In Act/ff '2)": find! a: Z (Pia; (Crater) 664:0!th W Q I P L( W/% 4') C9 remap») 5&6/6 (l 45/7 7‘, ' I Cost-Variety Relationship A C =(F/S) r2 +c 1/ (2‘ 7,3 . . F _ 5, Varletles 5 fl .- ¢ I7 NAME: STUDENT ID: 3 Dumping: 10 minutes Consider a domestic monopolist with constant marginal cost. As depicted in the price— quantity diagram below, foreign consumers’ individual valuation of the monopolist’s good is ' not as high as domestic consumers’ valuation but foreign market size makes for large overall demand. 0 Depict the monopolist’s optimal supply to the domestic market and the supply to the foreign market. g (219 o Depict domestic market price and the foreign market price. $6 fifa/g/r Li C1113 (gm): Ill: (magaéa/ V/M- @183 u If domestic consumers’ were given a choice, would they support or object to. the domestic monopolist’s dumping practitie abroad? Why? 538C405: o'l: Cons/gu/ /1C ,flegm 56/95 flémfi' \fffiéo) 05W wipe-c7! éfléfle’své'c flfl'ct- We; % m/a/Mi- cm W (l Il fl flea 0407/7 Mu? lax/am. ’L 1w" (“5&3 P Domestic Demand Foreign Demand /' NAME: STUDENT ID: 4 Infant-industry Protection: 10 minutes There are external economies of scale from agglomeration of IT services. By historic coin- cidence, all IT services for the world are currently provided by Silicon Valley (Home) but Bangalore (Foreign, asterisk) could hypothetically produce any quantity at lower average cost. The supply—demand diagram below depicts world equilibrium of the IT services industry when IT services are provided by Silicon Valley. 0 Explain Why the supply curve is forward falling and why price equals average cost on W the forward—falling supply curve. 271, C (52(an > farm/a 3i . ”we Huh!» I The two dotted linesdepict hypothetical demand schedule in the Foreign try. Un— der which demand schedule is infant—industry protection ultimately successful, under W which demand schedule will infant—industry protection be unsuccessful? ’1. ML Kifi CONE. M// 6: :«mvsfl {#40 0 Label the point at which successful infant—industry protection should be terminated. Sec 0/: o Are home consumers better off in the ultimate world equilibrium? Are foreign con— sumers better off in the ultimate world equilibrium? ”L, >95, Yes. ’7. World Market 173 O 0 CD U) E s 41 W ________________ 'c P s Q(P)=Ac OJ .2 L 1 . n- l\\ \l D’(1?\D'(P)‘l\ : DWP) leQiQ’ World Demand, Home and Foreign Supply 390/0? cum: 1'5 rwm/ «flair 5/6 0‘): 14144 w‘mfimlyy ; NAME: STUDENT ID: if ’ y l 5 Horizontal FDI and a quota: 10 minutes A domestic monopolist can enter a foreign market either by exporting from the domestic production site or by setting up a foreign affiliate that duplicates home operations abroad (horizontal FDI). Consider the price-quantity diagram below, where P“ : 2 is the price in the foreign market. The monopolist has increasing marginal cost as depicted. The foreign country‘s government imposes a quota, by which the domestic monopolist must not sell more than .5 units of its output abroad. Setting up a duplicate foreign afiiliate horizontal FDI causes a fixed cost F > 0. ( ) . #6: 0 o Depict the quantity that the monOpolist will sell in the foreign market if it exports. 3 / a By setting up a duplicate foreign-affiliate, the monopolist can jump the quota. Depict the extra profit that the monopolist can earn from setting up a duplicate foreign affiliate. 'L ' d we 05 0 Under what condition will the menopolist set up a duplicate foreign afiliate‘? ff #2 adafifimfl [raft/9 exceed real (as/‘5 o If the quota is made more restrictive (only .25 units permitted), will the monopolist become more or less likely to open a foreign affiliate? Cf‘ inc/Eases % r M’” /’$’{/ Z 550mm”? /% .5; [(0 Ac’ Domestic Price rr r._ .A-. A-u-A- Quantity NAME: STUDENT ID: 6 Vertical FDI: 10 minutes A domestic monopolist considers three alternative production arrangements (final assembly and sales are in the home economy). 1. Production technology and factor coats at home result in total coat T01 = Q2. 2. Owning a foreign afliliate and producing at its location abroad result in T02 = % -Q2. 3. Independent foreign suppliers face hold-up costs; as a result T03 = 1 - Q. Consider the price-quantity diagram below (you may think of quantities and prices in thou- sands). 0 Label the marginal cost curves. in the diagram with M01, M 02 and M 03. é I Which make—orebuy decision above is profit maximizing? What is the profit—maximizing quantity? MCZ ('5 fang; MMM/ m . (éuf Sitar/m6 a?” axes-wag) (fr-fly oé I Carri”: Q I a At the profit-manomizing quantity, depict the size of the internalization advantage or disadvantage associated with the make—or-buy decision. 15 it an internalization advantage? WM” \ Domestic fl C3 - «(ref & 54%) \ Demand flan L #61 Price Quantity NAME: STUDENT ID: I l 7 True' or False: 10 minutes State for each of the following statements Whether it is true, false, or indeterminate. Ex— plain your answer. I When a monopolist sells its good at a lower price in one market than in the other market, markets must be segmented (no arbitrage possible). 7;“, afifi’afim Jada/154mg M/W% 09%, M g 741/0’0465: % fan/é” 6L /M/rfa. 0 Under internal economies of scale, infant—mdustry protection is a welfare—improving policy if domestic demand is sufficiently large. - When the home economy opens up to free trade in an Intrasindustry Trade model (an increase in overall market size), it can happen that some domestic producers exit While more varieties become available to consumers. ...
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