ECON 340/0101 Spring 2007 Problem set 2 Instructions: Answer all questions and turn in the Problem Set in my mailbox in TYD 3105 by Thursday March 1, 2007 before 4pm. If you have questions come to office hours after class on Tuesday. QUESTION 1. Figure 1 illustrates the demand and supply schedules for pocket calculators in Mexico, a "small" nation that is unable to affect the world price. Answer the question(s) on the basis of this figure. Figure 1. Import Tariff Levied by a "Small" Country a) In the absence of trade, Mexico produces and consumes: b) In the absence of trade, Mexico's producer surplus and consumer surplus respectively equal: c) With free trade, Mexico imports: d) With free trade, the total value of Mexico's imports equal:e) With free trade, Mexico's producer surplus and consumer surplus respectively equal: f) With a per-unit tariff of $3, the quantity of imports decreases to: g) The loss in Mexican consumer surplus due to the tariff equals: h) The tariff results in the Mexican government collecting: i) Mexican manufacturers gain how much because of the tariff. j) The deadweight cost of the tariff totals: k) The tariff would be prohibitive (i.e., eliminate imports) if it equaled: QUESTION 2 Table 1. Production Costs and Prices of Imported and Domestic VCRs Imported VCRs Domestic VCRs Component parts $150 Imported component parts $150 Assembly cost/profit 50 Assembly cost 50 Nominal tariff 25 Profit 25 Import price after tariff $225 Domestic price after tariff $225 a) Prior to the tariff, the total price of domestically-produced VCRs is:b) Prior to the tariff, the total price of imported VCRs is: c) The nominal tariff rate on imported VCRs equals: d) Prior to the tariff, domestic value added equals: e) After the tariff, domestic value added equals: f) The effective tariff rate equals: QUESTION 3 Figure 2 illustrates the steel market for Mexico, assumed to be a "small" country that is unable to affect the world price. Suppose the world price of steel is given and constant at $200 per ton. Now suppose the Mexican steel industry is able to obtain trade protection, as discussed in the questions below. Answer the question(s) on the basis of this information. Figure 2. Alternative Nontariff Trade Barriers Levied by a "Small" Countrya) With free trade, the quantity of steel imported by Mexico equals: b) With free trade, Mexico's consumer surplus and producer surplus respectively equal: c) Suppose the Mexican government imposes an import quota equal to 2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals: d) Suppose the Mexican government imposes an import quota equal to 2 tons of steel. If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals: e) Suppose the Mexican government imposes an import quota equal to 2 tons of steel. If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals: f) Suppose instead that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The quantity of imports equals: g) Suppose that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). What is the total cost of the subsidy to the Mexican government? h) Suppose that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). Mexican steel producers gain producer surplus of: i) Suppose that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The welfare loss to Mexico due to inefficient domestic production equals:j) Suppose that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The overall deadweight welfare loss to Mexico equals: k) Suppose that the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-à-vis an export quota equal to 2 tons. Assuming Mexican importers behave as competitive buyers while foreign exporters behave as monopoly sellers, the overall welfare loss of the quota to Mexico is: l) Suppose that the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-à-vis an export quota equal to 2 tons. If Mexican importers behave as monopoly buyers while foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico is: QUESTION 4 Figure 3 illustrates the apple market for Sweden, assumed to be a "small" country that is unable to affect the world price. SSweden is the domestic supply and DSweden is the domestic demand. SSweden+Quota is Sweden's supply schedule with an import quota. On the basis of this information answer the question(s). Figure 3. Sweden's Apple Market a) In the absence of trade, Sweden's equilibrium price and quantity of apples would be:b) Suppose the rest of the world can supply apples to Sweden at a price of $0.60 per pound. With free trade, how many apples are produced by Sweden? How many are imported? c) At the free-trade price of $0.60 per pound, Sweden's consumer and producer surplus totals: d) If SSweden+Quota represents the supply schedule after a quota is levied, Sweden's imports will equal: e) After the quota is levied, the price of apples in Sweden will equal: f) As a result of the quota, Sweden's consumer surplus: g) The quota leads to a deadweight welfare loss for Sweden of an amount equaling: h) The quota's revenue effect equals: i) Assume that Swedish import companies behave as competitive buyers while foreign export companies behave as a monopoly seller. Compared to free trade, Sweden's import quota results in domestic welfare:j) Assume that Swedish import companies behave as a monopoly buyer while foreign export companies behave as competitive sellers. Compared to free trade, Sweden's import quota results in domestic welfare: k) If the Swedish government