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True False For questions 1-12, assume that the market for consumer electronics is monopolistically competitive. Firms within this market are...

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True False For questions 1-12, assume that the market for consumer electronics is monopolistically competitive. Firms within this market are symmetric (have the same cost structure and face the same consumer demands). 1. Increasing the fixed costs of producing new varieties leads existing varieties to enter the market. 2. Lowering the fixed costs of producing new varieties intensifies competition and lowers prices. 3. In autarky, consumers in larger markets are better off than consumers in small markets because they enjoy more varieties and face lower prices. 4. Trade expands the number of varieties by increasing the price per good. 5. With monopolistic competition we observe intra industry trade (e.g. trade within the industry of golf clubs), because people take advantage of arbitrage opportunities. 6. Consumers can gain from intra-industry because of a larger set of varieties that can be consumed. 7. Competitive firms charge the same price in all markets, even if the elasticity of demand differs across markets. 8. Monopolists charge the same price in all markets only if the elasticity of demand is the same in all markets 9. In an innovation-intensive industry like pharmaceuticals, consumers are made better off if government regulators entirely eliminate monopoly rents. 10. Price discrimination across markets is made easier by government bans on re-importation. SHORT ANSWER 1. In the monopolistic competition model of trade, countries trade because they like to consume all the available varieties. Suppose you can collect country level trade flows and GDP data. How can you verify the monopolistic competition model with data? What do you expect is the impact of transportation costs? 2. Suppose you are on Tennessee committee to facilitate foreign direct investment into the local industry. Suppose labor is specific to their industry, because of particular working knowledge that can only be obtained by extensive training and experience, but capital can flow between the industries. Show in a figure how the inflow of capital impacts the local price of capital. Practice Questions: 1. When central banks intervene in foreign exchange markets to buy and sell currencies, this activity is reflected in the statement of international transactions as a change in: a. Foreign aid b. Private capital flows c. The statistical discrepancy d. Official reserve holdings
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2. Demand for official reserves is the least in which of the following international monetary systems? a. Dirty float b. Clean float c. Mixture of clean and dirty floats d. Fixed rate system 3. The ultimate goal of devaluation is to: a. Reduce both foreign exchange inpayments (export value) and outpayments (import value) b. Reduce foreign exchange outpayments (import value) and increase foreign exchange inpayments (export value) c. Reduce foreign exchange inpayments (export value) with foreign exchange outpayments (import value) unchanged d. Increase both foreign exchange inpayments (export value) and outpayments (import value) 4. Foreign Exchange Arbitrage refers to: a. the simultaneous purchase and sale of a foreign currency asset in different markets to take advantage of price differentials b. actions taken to lower currency trading risks and make the markets safer c. the forgiving of penalties and other punishments for illegal foreign exchange activities d. government purchases or sales of a nation's own currency in international markets to change or stabilize the value of the currency 5. In the Ricardian model of trade comparative advantage is determined by a. Production technologies b. Relative Factor Endowments c. Economies of Scale d. Specific Factors 6. Gains from trade can be attributed to: a. Specialization in production b. Exposure to different prices c. Providing resources in short supply d. All of the above 7. A tariff causes an income redistribution from: a. The government to producers and consumers b. Producers and consumers to the government c. Consumers to producers and the government d. Consumers and the government to producers 8. When a small nation levies a tariff, a. The nation’s terms-of-trade improve b. The nation’s terms-of-trade deteriorate c. The tariff burden is shared between citizens in the importer and the exporting nation d. Citizens in the importer bear the entire burden
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