# PS04 - EC 340 Spring 2011 Problem Set 4 1 Which theorem...

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Unformatted text preview: EC 340 Spring 2011 Problem Set 4 1. Which theorem states that the capital‐abundant country will have a comparative advantage in producing the capital‐intensive good? 2. Which theorem states that an increase in the price of the labor‐intensive good relative to the price of the capital‐intensive good will increase the real income of workers and reduce the real income of capital owners? 3. Which two theorems combined imply that the introduction of trade benefits a country’s abundant factor and harms its scarce factor? 4. In the model of monopolistic competition, what happens to the PP curve when trade is permitted? 5. The following figure represents a monopolistically‐competitive industry that operates in two countries (A and B). Which country has the larger market? How would this figure be modified if A and B were permitted to trade with each other? 6. Suppose that Pfizer (an American pharmaceutical company) has a monopoly in the U.S. market for a vaccine that prevents the common cold. Further suppose that the demand curve for this vaccine in the U.S. market is represented in the diagram below. Draw the marginal revenue curve for Pfizer’s vaccine. 7. 8. 9. 10. 11. 12. 13. 14. 15. Suppose that Pfizer’s marginal cost of production is \$15 per dose of vaccine, regardless of how much vaccine is produced. Combined with the information in question 6, how many doses of vaccine will Pfizer sell in the U.S. market, and what price will they charge? Assuming that there are no fixed costs of production, how much profit will Pfizer earn? What is the value of consumer surplus when Pfizer sells its profit‐maximizing quantity of vaccine? Suppose that Bayer (a German company) produces an identical vaccine. What (approximately) would Bayer’s marginal revenue be from selling just one dose of vaccine in the U.S. market? Assume that Pfizer and Bayer have identical costs and that there are no transportation costs. If Bayer is permitted to sell vaccine in the U.S. market, what will be the equilibrium value of Pfizer’s and Bayer’s marginal revenues? It can be shown that if trade between the two countries is permitted, total sales in the U.S. market will be 80/3 doses. This will also be the total sales in the German market. Of the 80/3 doses sold in the U.S. market, how many doses will be imported? How many doses will Pfizer export? Based on your answers to question 12, how much profit will Pfizer earn on the combination of its domestic sales and its exports? With trade, what is the value of consumer surplus in the U.S. market? How does the total of Pfizer profit plus U.S. consumer surplus with trade compare to the total under autarky? ...
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