Homework 6
UCDavis, 160a, Spring, 2008
Prof. Farshid Mojaver
Problem set 1: Economies of Scale and Imperfect Competition
Problem 1
There are some shops in Japan that sell Japanese goods imported from the United States
at a discount over the prices charged by other Japanese shops. How is this possible?
Problem 2
Consider two industries: In industry A, internal economies of scale allow monopolistic
competition to develop. Can this give rise to trade? What sort of trade is likely here
(similar products and countries)? Explain your reasoning. Discuss the possible welfare
effects. Now consider industry B. Each firm is perfectly competitive, but the industry as a
whole, gains from “external economies”. Can this lead to trade? Why does this sort of
trade often lead to losses for consumers in the importing country or countries?
Problem 3
Consider the long-run trade equilibrium in the monopolistic competition model as
illustrated below. Consider a situation where the foreign and domestic demand for a
particular good increase. For instance, suppose that this is the market for cars and lower
gasoline prices generates higher demand.
a) Redraw the Figure below and show what happens when this change in demand occurs.
Specifically, show which curve(s) shift.
b) If the old equilibrium is at point C, describe where the new long run equilibrium
occurs, and what has happened to the number of firms and the price they charge.
Problem Set 2: Trade Policy
Problem 1 (WTO)
Go to: http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm , and find out
how many countries belong to the WTO. Which countries joined most recently?
Problem 2 (WTO)
Which of the following actions would be legal under GATT, and which would not?
a. A U.S. tariff of 20 percent against any country that exports more than twice as
much to the United States as it imports in return.
b. A subsidy to U.S. wheat exports, aimed at recapturing some of the markets lost to
the European Union.
c. A U.S. tariff on Canadian lumber exports, not matched by equivalent reductions
on other tariffs.
d. A Canadian tax on lumber exports, agreed to at the demand of the United States to
placate U.S. lumber produces.
e. A program of subsidized research and development in areas related to hightechnology goods such as electronics and semiconductors.
f. Special government assistance for workers who lose their jobs because of imports
competition.
Problem 3
Assume Austria’s supply and demand for beef is:
S = 200 + 20P
D = 950 - 30P
a. Derive and graph Austria’s import demand schedule. If Austria’s agricultural
department outlawed purchasing foreign beef to prevent mad-cow disease, what would be
the price of beef be?
b. Now consider Britain, with the following demand and supply schedules for beef:
S* = 40 + 40P
D* = 205 - 15P
Derive Britain’s export supply schedule, if Britain’s agricultural department outlaws
exporting beef until more tests are run for mad-cow disease. What would be the price of
beef in the absence of “trade”?
c. Once the tests have been run and all sick cows have been quarantined, beef can be
openly traded between Austria and Britain. What is the world price? What is the volume
of trade?
Problem 4
What happens if Austria continues to limit beef “imports” from Britain by adding a
specific tariff of 1.0 on beef imports?
a. Calculate the effect of the tariff on (1) the price of beef in each country, (2) the
quantity of beef supplied and demanded in each country, and (3) the volume of “trade.”
b. Determine the effect of the tariff on the welfare of each of the following groups: (1)
Austrian beef producers; (2) Austrian Consumers; (3) The Austrian government.
Problem 5
Suppose that Britain was not able to resolve its “Mad Cow” problem and that Austria has
to import beef from a much larger country, like the U.S., where
S* = 200 + 200P
D* = 1025 - 75P
(Notice that this implies that the U.S.’s price of beef in the absence of trade would be the
same as Britain’s.)
a. Recalculate the free trade equilibrium and the effects of a 1.0 specific tariff by Austria.
b. Relate the difference in results to the discussion of the “small country” case in the text.