Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Page 10Page 11Page 12Final Exam, Fall 2005TRADE POLICIES1-4 The United States, a large country, imposes a binding quota onimports of textiles from China.1. The price of textiles in the United Statesa) risesb) remains the samec) fallsd) remains the same or fallse) cannot tell from the information given2. The price of textiles in Chinaa) risesb) remains the samec) fallsd) remains the same or risese) cannot tell from the information given3. Consumer surplus in the United Statesa) risesb) remains the samec) fallsd) remains the same or risese) cannot tell from the information given4. Welfare in the United Statesa) risesb) remains the samec) fallsd) remains the same or risese) cannot tell from the information given5-8. The United States, a large country, removes a specific subsidy onagricultural exports.5. The price of agricultural products in the United Statesa) falls by more than the amount of the subsidyb) falls by exactly the amount of the subsidyc) falls by less than the amount of the subsidyd) remains the samee) rises6. The price of agricultural products 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. Consumer surplus in the United Statesa) risesb) remains the samec) fallsd) remains the same or fallse) cannot tell from the information given8. Welfare in the United Statesa) risesb) remains the samec) fallsd) remains the same or fallse) cannot tell from the information givenFACTOR MOBILITY9-12. The United States and Mexico produce houses using labor and land. Initially, labor is scarce relative to land in the United States comparedto Mexico. Suppose the countries share the same technology. Consider the effects of allowing labor to move freely between the twocountries.9. Who benefits in the United States?a) workersb) landownersc) workers and landownersd) neither workers nor landownerse) cannot tell from the information given10. Who is hurt in the United States?a) workersb) landownersc) workers and landownersd) neither workers nor landownerse) cannot tell from the information given11. Who benefits in Mexico?a) all workers, regardless of whether they leave or stayb) only workers who stayc) only workers who leaved) landownerse) landowners and workers who stay12. Who is hurt in Mexico?a) all workers, regardless of whether they leave or stayb) only workers who stayc) only workers who leaved) landownerse) landowners and workers who stayFOREIGN DIRECT INVESTMENT13-16 A firm is deciding how to serve the market in India. 13. If the firm lacks ownership advantage, what mode will it chose?a) exportsb) foreign direct investmentc) licensingd) joint venturese) stay out of Indian market14. If there is no location advantage, what mode will the firm choose?a) exportsb) foreign direct investmentc) licensingd) outsourcinge) stay out of Indian market15. If there is no internalization advantage, what mode will the firmchoose?a) exportsb) foreign direct investmentc) licensingd) exports and foreign direct investmente) stay out of Indian market16. If there are ownership, location, and internalization advantages, whatmode will the firm choose?a) exportsb) foreign direct investmentc) licensingd) exports and licensinge) stay out of Indian marketTRADE POLICY PROBLEMSIn the United States (US), inverse demand for clothing is while inverse supply of clothing is In the rest of the world(ROW), inverse demand for clothing is while inversesupply of clothing is 1. Derive the US autarky price and quantity. Derive the US import demand (including slope-intercept form).Derive the ROW autarky price and quantity. Derive the ROW export supply (including slope-intercept form).2. Derive the free trade price and US imports under free trade. Derive US quantity demanded and quantity supplied under free trade.3. Derive the US tariff-ridden import demand for a specific tariff t = 6(including slope-intercept form). Derive the ROW price, the US price, and US imports with the tariff.Derive US quantity demanded and quantity supplied with the tariff. How large of a tariff would the United States need to impose toprohibit all imports?4. 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).5. Define and derive the US consumption distortion and productiondistortion.Define and derive the US efficiency loss and terms of trade gain.6. Derive the change in welfare in the United States due to the tariff. Confirm that the net welfare calculation yields the same answer. Is the United States better or worse off with the tariff and why?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, Fall 20051a The price of textiles in the United States rises.2c The price of textiles in China falls.3c Consumer surplus in the United States falls due the higher price.4c Welfare in the United States falls due to consumption and productiondistortions (and transferring quota rents to foreign firms)5c The price of agricultural products in the United States falls by less theamount of the subsidy.6c The price of agricultural products in the ROW rises by less theamount of the subsidy.7a Consumer surplus in the United States rises.8a Welfare in the United States rises due to removing consumption andproduction distortions and avoiding terms of trade loss.9b Landowners in the United States benefit.10a Workers in the United States are hurt.11a All workers, regardless of whether they leave or stay benefit inMexico.12d Landowners in Mexico are hurt.13e Without ownership advantage, the firm will stay out of the Indianmarket.14a Without location