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TAMU ECON 452 - E452ex3F04

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Final Exam, Fall 2004TRADE POLICIES1-4 The United States, a large country, removes a binding quota onimports of sugar.1. The price of sugar in the rest of the worlda) risesb) fallsc) remains the samed) a) or c)e) b) or c)2. The price of sugar in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)3. The quantity demanded of sugar in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)4. The quantity supplied of sugar in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)5-8. The United States, a large country, removes a subsidy on exports ofsteel.5. The price of steel in the rest of the worlda) risesb) fallsc) remains the samed) a) or c)e) b) or c)6. The price of steel in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)7. The quantity demanded of steel in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)8. The quantity supplied of steel in the United Statesa) risesb) fallsc) remains the samed) a) or c)e) b) or c)FACTOR MOBILITY9-12. The United States and Mexico produce swimming pools using laborand land. Initially, Mexico has more workers per acre than the UnitedStates. Suppose the countries share the same technology. Considerthe effects of allowing labor to move freely between the twocountries.9. The wage in the United States willa) riseb) fallc) remain unchangedd) a) or c)e) b) or c)10. The rent in the United States willa) riseb) fallc) remain unchangedd) a) or c)e) b) or c)11. Land owners in the United States will be madea) better offb) worse offc) no better, no worsed) a) or c)e) b) or c)12. Workers initially in the United States will be madea) better offb) worse offc) no better, no worsed) a) or c)e) b) or c)FOREIGN DIRECT INVESTMENT13-16 GE (a US company) is deciding how to serve the market in China.13. GE’s unique managerial skills would best be described as aa) ownership advantageb) location advantagec) internalization advantaged) a) and c)e) b) and c)14. China’s relative abundance of unskilled labor would best bedescribed as aa) ownership advantageb) location advantagec) internalization advantaged) a) and c)e) b) and c)15. The risk that a Chinese licensee might hire child labor would best bedescribed as aa) ownership advantageb) location advantagec) internalization advantaged) a) and c)e) b) and c)16. If there is ownership advantage, location advantage, andinternalization advantage, what should GE do?a) export to Chinab) establish a production subsidiary in Chinac) license a Chinese firmd) stay out of the Chinese markete) shut down entirelyTRADE POLICY PROBLEMSIn the United States (US), inverse demand for clothing is P ' 50 & QD,while inverse supply of clothing is In the rest of the worldP ' 10 % QS.(ROW), inverse demand for clothing is while inverse supplyP(' 25 & Q(D,of clothing is P(' 3 % Q(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 = 8 (includingslope-intercept form). Derive the ROW price, the US price, and USimports with the tariff.5. Derive US quantity demanded and quantity supplied with the tariff.Derive the change in consumer surplus, producer surplus, andgovernment revenue in the United States due to the tariff.6. Derive the US consumption distortion and production distortion.Derive the US efficiency loss and terms of trade gain. Derive thechange in welfare in the United States due to the tariff. Is the UnitedStates better or worse off with the tariff?WORLD MARKET GRAPH: US IMPORT DEMAND, ROW EXPORTSUPPLY, 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.US MARKET GRAPH: 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 20041a The price of sugar in the rest of the world rises.2b The price of sugar in the United States falls.3a The quantity demanded of sugar in the United States rises.4b The quantity supplied of sugar in the United States falls.5a The price of wheat in the rest of the world rises.6b The price of steel in the United States falls.7a The quantity demanded of steel in the United States rises.8b The quantity supplied of steel in the United States falls.9b The wage in the United States will fall.10a The rent in the United States will rise.11a Land owners in the United States will be made better off.12b Workers initially in the United States will be made worse off.13a GE’s unique managerial skills would best be described as aownership advantage.14b China’s relative abundance of unskilled labor would best bedescribed as a location advantage.15c The risk that a Chinese licensee might hire child labor would best bedescribed as a internalization advantage.16b If there is ownership advantage, location advantage, andinternalization advantage, GE should establish a productionsubsidiary in China.PROBLEMS1 US autarky price and quantity50 & QA' 10 % QA6 2QA' 40 6 QA' 20PA' 50 & QA' 50 & 20 ' 30US import demand P ' 50 & QD6 QD' 50 & PP ' 10 % QS6 QS'&10 % PM ' D & S ' QD& QS' 50 & P & &10 % PM ' 60 & 2P 6 P ' 30 &12QMGraph of US import demand2. ROW autarky price and quantity 25 & QA(' 3 % QA(6 2QA(' 22 6 QA(' 11PA(' 25 & QA(' 25 & 11 ' 14ROW export supplyP(' 3 % Q(S6 Q(S'&3 % P(P(' 25 & Q(D6 Q(D' 25 & P(X(' S(& D(' Q(S& Q(D'&3 % P(& 25 & P(X('&28 % 2P(6 P(' 14 %12Q(XGraph of the ROW export supply3. Free trade priceM ' X(6 60 & 2P '&28 % 2P(6 88 ' 4P 6 P ' P(' 22US quantity of importsM ' 60 & 2P' 60 & 2 (22) ' 60 & 44 ' 16US quantity demanded and quantity suppliedP ' 50 & QD6 22 ' 50 & QD6 D / QD' 50 & 22 ' 28P ' 10 % QS6 22 ' 10 % QS6 S / QS' 22 & 10 ' 12b) US tariff-ridden import demandMT' 60 & 2PT' 60 & 2(P(T% 8) ' 60 & 2P(T& 16MT' 44


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