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UW-Madison ECON 101 - Economics 101, Problem Set 4

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Professor Scholz Posted: 9-22-09 Economics 101, Problem Set #4 (version 2!) Due: 9-29-09 1) (Output per unit of Labor) Wine (Gallons) Cloth (Yards) England 12 6 Portugal 8 2 a) When observing this Table, Will made the following remark, “I don’t see why England should trade with Portugal, it is better at producing both wine and cloth. England should focus all of its resources on domestic production.” Do you agree with Will? Why or why not? b) What are the opportunity costs of producing wine in terms of cloth for each country? Which country has an absolute advantage in producing wine? Which country has an absolute advantage in producing cloth? c) Which country has a comparative advantage in producing wine/cloth? d) Assume 1 unit of labor is transferred from cloth to wine in England and 2 units from wine to cloth in Portugal. What is the total net gain from these transfers of labor? e) Under what range of prices (in terms of wine and cloth) would both countries gain from trade? 2) The Prime Minister of Oceania wants to improve his country’s struggling automobile industry. He plans to do this by implementing strict quotas on the importation of foreign automobiles and very steep tariffs on the few automobiles imported. In a few years, once the automobile industry has matured, he plans to remove the tariffs, allowing for competition on the world market. He believes his policies will both allow the domestic car industry to grow and generate a great deal of revenue for the government. Do you agree with his hypothesis? Why or why not?3) United States Cuba Price Quantity Demanded Quantity Supplied Quantity Demanded Quantity Supplied 60 230 180 430 310 70 200 200 420 330 80 170 220 410 360 90 150 240 400 400 100 140 250 390 440 a) From the above table, what will be the equilibrium price and quantity in each country under autarky? b) If trade is allowed between the US and Cuba, what will the new equilibrium price and quantity be? How much will each country export/import? c) Suppose Cuba imposes an import quota of 30 units. How will this benefit/hurt producers/consumers? Under this scenario, how many units will Cuba import? 4) Suppose that the US market for portable cassette players is represented by the demand equation P=180-6Q and supply equation P=3Q. a) If no international trade is allowed, what will be the equilibrium price and quantity of cassette players? b) Assume there are no barriers to trade and that the world price of portable cassette players is $30. How many cassette players will be imported/exported? c) Suppose the US imposes a tariff of $12 per cassette player i) How many will now be imported/exported? ii) What will the change be in consumer surplus? iii) What will the change be in producer surplus? iv) How much will the government collect as revenue?v) Calculate the deadweight loss. d) Suppose that instead of a tariff, the US implements an import quota of 9 cassette players i) How many will now be imported/exported? ii) What will the change be in consumer surplus? iii) What will the change be in producer surplus? iv) Calculate the deadweight loss. v) Is there a difference in your answer for v) in part c and iv) in part d? Explain. 5) Using the assigned readings as sources, explain how it is possible that US expenditures to foreign producers (e.g. outsourcing in the high-tech industry) could eventually stimulate the domestic economy. 6) The Microsoft Zune, a hot commodity that is flying off of the shelves in the United States has not been able to replicate its commercial success in Western Europe. Hoping to gain traction in England, Microsoft unveils the Zune at a low price of $99.99. The European Union has a very strict anti-dumping policy. An independent economic consulting firm has determined that the average cost by Microsoft of producing a Zune is $105. Is this a clear-cut case of “dumping”? Why or


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UW-Madison ECON 101 - Economics 101, Problem Set 4

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