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Unformatted text preview: ARE 138 Winter 2011
Due at start of class Thursday, Jan 20th (16 ) 1. Two regions have the following supply and demand functions for a good: D"s=5000-50P"S
sF=-1,000+ 1500 PF a.(4) Assuming autarky (no trade possible), find the minimum, maximum and equilibrium
price in each market, and the quantity produced /consumed. b. (6) If trade is opened, who will import and who will export? What range will the world
price fall within? (verbal answer, before solving). Derive the import demand and export supply
curves for this range of prices (write their formulas), checking to see whether either function is
kinked in the relevant price range. Now, solve for the equilibrium world price. How much is
produced, consumed, and exported or imported, in each country? c. (6) Sketch the import demand and export supply curves from part c, for the relevant price
range. What is the net effect of ﬂee trade on each region's total social welfare? On world social
welfare? Who gains, and who loses from trade within each country (verbal answer)? 2. (l 8) A small country has the following demand and supply for a good: (h refers to home country)
D”: 10,000 - 1,000 P“
8s = -2,000 + 2,000 P” a. (2) Find the maximum price, minimum price, market price and quantity under autarky. b. (12) Now suppose free trade is allowed. (country can trade at world price PW). Under what price condition will the ﬁrm become an exporter? Derive the country's export
supply ﬁrnction, showing the equation for each segment of the supply function, the price range it
applies to, and the quantity of exports that corresponds to the ’kink“. Under what price condition will the ﬁrm become an importer? Derive the country's import
demand function, showing the equation for each segment of the function, the price range it applies
to, and the quantity of imports that correSponds to the kink c. (4)Using your answer from part b, ﬁnd the quantity exported or imported by the home
country, for the following world prices: $12, $7, $3 and $0.50. 3.(10) Imagine US demand for sugar is D“5 = 7,680 - 21,000 P, and domestic sugar supply is Sus = -320 + 4000P. Outside the US, the world sugar supply is perfectly elastic at PW = $0.12. a. What is the US sugar price, quantity, and producer and consumer surplus under autarky? b. How much would be produced and consumed in the US if ﬁee trade was allowed? (Assume the
US is a “small country” relative to the world sugar market). Now what are PS and CS? What is the
US net welfare gain from trade? Who is likely to oppose this trade liberalization policy?
c. Now assume the US allows sugar imports as in part b, but charges a tariff of $.10/lb. on imports.
Find the new US sugar price, production, consumption and PS and CS. Also, how much revenue
does the US government make from the tariffs collected? d. What import quota could the US set to achieve the same domestic sugar price as in part c? In what way might social welfare differ as compared with the tariff result in part c? (6) 4. Imagine three countries have the following factor endowments: Country A Country B Country C
Farmland 4000 200 100
Labor 1000 600 200
Capital 2000 300 600 These nations produce three products: grain (farmland-intensive), hand-knotted wool rugs (labor~
intensive) and heavy equipment (capital-intensive) 3. Calculate K/A, HA and K/L for each country.
b. According to the Heckscher-Ohlin model, what general patterns of trade do you expect to see
between these countries? ...
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