solutions-midterm2-eco101-10

solutions-midterm2-eco101-10 - [Jwc ,>!" fI. NAME:...

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,>!" [Jwc l\ fI. 1151NeG 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 ~
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1 NAME: STUDENT ID: 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 ff (' C (" P=1/(bn)+c / // / / / P=(F/S) 11 +C=5 CL / / / ' Q) <..l ·c CL / , , I ,~ i . ~V'P (~ c -_____________ l\ ___ t_______________________ _ ~ I o n Varieties 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. !'-1 rZ V1L z.. ~ C- J~ 1t- .l J,VI Explain in one sentence why free entry implies that average cost equals price in equilibrium. Identify the average-cast-variety relationship (CC) in the figure above. rj rp:> A C I rvUA-, /II/t'" Y1-- .tM ~ ~<-·l l-J I t- J 1{ WI ~ ~i.~ p~ AG Now consider a market with higher fixed costs than shown in the diagram. 2. • Depict a market with higher fixed costs. Are there more or fewer varieties in this case? Why? c-; r~ Vwy>,~"yj ~( c..- ~rr F tM-<. c-v., j fq) V~'Lr ~ l+2. . brz j J' ( irtM '~V'r 2 2
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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 Cj = 25,cz = 30,C3 = 35 , C4 = 70. There are four ideas for foreign firms with marginal costs Cr = C; = C; = C~ = 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 120 Ci ::; - + c - 25, n ( where n is the number of active firms in the domestic market, and c is the average marginal cost of all active firms in the domestic market. Show that the number of domestic firms that enter the home market is
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solutions-midterm2-eco101-10 - [Jwc ,&gt;!&quot; fI. NAME:...

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