Final Exam, Spring 2005TRADE POLICIES1-4 Palau, a small country, imposes a binding quota on imports of buffs.1. The price of buffs in Palaua) risesb) remains the samec) fallsd) b) or c)e) cannot tell from the information given2. The price of buffs in the ROWa) risesb) remains the samec) falls by the same amount that the price in Palau risesd) falls by the same amount that the price in Palau fallse) cannot tell from the information given3. Welfare in Palaua) risesb) remains the samec) fallsd) a) or b)e) cannot tell from the information given4. Welfare in the ROWa) risesb) remains the samec) falls if welfare in Palau risesd) falls if welfare in Palau fallse) cannot tell from the information given5-8. Vanuatu, a small country, imposes a specific subsidy on exports oftorches.5. The price of torches in Vanuatua) rises by more than the amount of the subsidyb) rises by exactly the amount of the subsidyc) rises by less than the amount of the subsidyd) remains the samee) falls6. The price of torches in the ROWa) rises by more than the amount of the subsidyb) rises by exactly the amount of the subsidyc) rises by less than the amount of the subsidyd) remains the samee) falls7. Welfare in Vanuatua) risesb) remains the samec) fallsd) a) or b)e) cannot tell from the information given8. Welfare in the ROWa) risesb) remains the samec) falls if welfare in Vanuatu risesd) falls if welfare in Vanuatu fallse) cannot tell from the information givenFACTOR MOBILITY9-12. The United States and Mexico produce swimming pools using laborand land. Initially, labor is scarce relative to land in the United Statescompared to Mexico. Suppose the countries share the sametechnology. Consider the effects of allowing labor to move freelybetween the two countries.9. Welfare in the United States willa) riseb) fallc) remain unchangedd) a) or c)e) b) or c)10. World welfare willa) riseb) fallc) remain unchangedd) a) or c)e) b) or c)11. Who is hurt in the United States?a) workersb) landownersc) workers and landownersd) neither workers nor landownerse) cannot tell from the information given12. Who is hurt in Mexico?a) workersb) landownersc) workers and landownersd) neither workers nor landownerse) cannot tell from the information givenFOREIGN DIRECT INVESTMENT13-16 Microsoft is deciding how to serve the software market in China. 13. The risk that employees, once trained, might leave to work for rivalfirms suggests that which type of advantage might be lacking?a) ownershipb) locationc) internalizationd) a) and c)e) b) and c)14. If that advantage is indeed lacking, what option cannot be ruled out?a) exportsb) foreign direct investmentc) licensingd) a) and c)e) b) and c)15. The risk that a Chinese licensee might try to sell software outside ofChina (in violation of the terms of the license) suggests what type ofadvantage might be present?a) ownershipb) locationc) internalizationd) a) and c)e) b) and c)16. If that advantage is indeed present, what option is ruled out?a) exportsb) foreign direct investmentc) licensingd) a) and c)e) b) and c)TRADE POLICY PROBLEMSIn the United States (US), inverse demand for clothing is P ' 71 & 2 QD,while inverse supply of clothing is In the rest of the worldP ' 31 % 2 QS.(ROW), inverse demand for clothing is while inverse supplyP(' 47 & 2 Q(D,of clothing is P(' 7 % 2Q(S.1. Derive the US autarky price and quantity. Derive the US importdemand (including slope-intercept form).2. Derive the ROW autarky price and quantity. Derive the ROW exportsupply (including slope-intercept form).3. Derive the free trade price and US imports under free trade. DeriveUS quantity demanded and quantity supplied under free trade.4. Derive the US tariff-ridden import demand for a tariff T = 12 (includingslope-intercept form). Derive the ROW price, the US price, and USimports with the tariff. Derive US quantity demanded and quantitysupplied with the tariff. How large of a tariff would the United Statesneed to impose to prohibit all imports?5. Derive the change in consumer surplus, producer surplus, andgovernment revenue in the United States due to the tariff (startingwith the general equations and being sure to indicate the areascorresponding to each on the US graph).6. Define and derive the US consumption distortion and productiondistortion. Define and derive the US efficiency loss and terms oftrade gain. Derive the change in welfare in the United States due tothe tariff. Confirm that the net welfare calculation yields the sameanswer. Is the United States better or worse off with the tariff andwhy?DRAW WORLD MARKET GRAPH HERE: US IMPORT DEMAND, ROWEXPORT SUPPLY, US TARIFF-RIDDEN IMPORT DEMANDIndicate US and ROW autarky prices, free trade price, US imports underfree trade, US tariff-ridden price, ROW tariff-ridden price, and US tariff-ridden imports.DRAW US MARKET GRAPH HERE: US DEMAND, US SUPPLYIndicate free trade price, US quantity demanded and quantity suppliedunder free trade, US tariff-ridden price, US quantity demanded and quantitysupplied with the tariff, and ROW tariff-ridden price. Label areascorresponding to change in consumer surplus, change in producer surplus,change in government revenue, production distortion, consumptiondistortion, efficiency loss, and terms of trade gain.Final Exam Solutions, Spring 20051a The price of buffs in Palau rises.2b The price of buffs in the ROW remains the same since Palau is asmall country.3c Welfare in Palau falls due to consumption and production distortions.4b Welfare in the ROW remains the same.5b The price of torches in Vanuatu rises by exactly the amount of thesubsidy.6d The price of torches in the ROW remains the same.7c Welfare in Vanuatu falls.8b Welfare in the ROW remains the same.9a Welfare in the United States will rise.10a World welfare will rise.11a Workers in the United States are hurt.12b Landowners in Mexico are hurt.13b Location advantage might be lacking.14a Without location advantage, exports cannot be ruled out.15c Internalization advantage might be present.16c With internalization advantage present, licensing is ruled out.PROBLEMS1 Derive US autarky price and quantity.71 & 2QA' 31 % 2 QA, 4QA' 40, QA' 10PA' 71 & 2 QA' 71 & 20 ' 51Derive the US import demand (including slope-intercept form).P ' 71 & 2 QD, QD'712&12PP ' 31 % 2 QS, QS' &312%12PM ' D & S ' QD& QS'712&12P & &312%12PM ' 51 & P, P ' 51 & QM2. Derive the ROW autarky price and quantity. 47 & 2QA(' 7 % 2QA(, 4QA(' 40, QA(' 10PA(' 47 & 2QA(' 47 & 20 ' 27Derive the ROW