INTERNATIONAL TRADE
Questions:-
Consider the
market for wheat. Assume that U.S. is a small country, compared to the whole
world and as a result, a price-taker in the world market (changes in U.S.
production or consumption doesn’t change the world price).Furthermore, assume
that the world price is lower than the
Show quantity demanded of wheat in U.S. .
Show quantity supplied of wheat in U.S. .
Label world price as Pw.
Show quantity of import or export .(you determine whether good is imported or exported).
Show the CS and PS with trade. Indicate the gain from trade on your graph.
Now suppose that a tariff of $t/per ton is imposed on imported/exported wheat. Assume that trade still occurs after the tariff.Label the effects of this tariff on your diagram.
Show quantity of imports/exports after tariff .
Show the quantity
of wheat demanded in
Show the quantity
supplied of wheat in
Show the price of wheat in domestic market after tariff.
Show the CS,PS and Government revenue after the tariff. Indicate the DWL due to tariff(compared to the case of free trade).
Now suppose that a quota is imposed on imported/exported wheat. Assume that trade still occurs after the the quota.Label the effects of this quota on your diagram.
Show quantity of imports/exports after the quota .
Show the quantity
of wheat demanded in
Show the quantity
supplied of wheat in
Show the price of wheat in domestic market after the quota .
Show the CS,PS and Government revenue after the quota. Indicate the DWL due to quota (compared to the case of free trade).
EXTERNALITIES
1.(30 points)Consider the market for paper.The
market for paper is perfectly competitive, but it exhibits externalities.
Specifically, paper makers produce dioxin , which is
harmful for the population. Suppose that the harm to the health of the people
is $5 per unit of paper .
a)Graphically
illustrate the market for paper. Show the equilibrium price and quantity. Also
show the socially efficient quantity. Be sure to label the private costs and
social costs.
b)Using
taxes, how could the government generate the efficient outcome? What should be
the tax size? Show your answer on graph, and explain.
2.Consider the market for automobiles.Suppose there are two car makers, ford and GM,
who both produces 500 tons of glop a year(that’s bad stuff).So, in total , they
are producing 1000 tons of glop per year.The two
firms differ in their cost of reducing pollution.
For Ford, the cost is:- For GM, the cost is,
$.5 million/ton for
first 100 tons. $1.0 million/ton for first 100 tons,
$.7 million/ton for
next 100 tons.
$1.2 million/ton for next 100
tons,
$.9 million/ton for
next 100 tons. $1.4 million/ton for next 100 tons,
$1.1 million/ton for
next 100 tons. $1.6 million/ton for next 100 tons,
and,$ 1.3 million/ton for the last 100 tons. and, $1.8 million/ton for the last 100 tons.
Now
suppose that EPA wants to reduce production of glop to 800 tons per year.Consider the three following methods for reducing
pollution.
1.The EPA could
mandate that both firms reduce their production of glop to 400 tons per year.
2.The EPA
could tax glop at the rate of $.7
million/ton.
3.The EPA could
produce pollution permits for 800 tons of glop and auction them.
Show how much each of these
plans would cost firms. Which firm is going to reduce production of glop in
case of plan 2 and 3?Also indicate what information
EPA must possess to implement each plan. Which plan is the most efficient(which plan costs the least and requires the least
information from the EPA)?
PUBLIC GOODS
Give example of a non-rival,excludable good. Briefly explain why your example qualifies.
Give example of a rival, non-excludable good. Briefly explain why your example qualifies.
Give example of public goods.
What is the free-rider problem?
SAMPLE MULTIPLE CHOICE QUESTIONS:-
1. _____
Which
of the following pairs includes both a positive
and a normative question?
A.
How much coffee will people drink after a tax is
placed on imported coffee beans? Is this tax going to improve welfare of the
society?
B.
Should we raise the minimum wage? What is the best policy for fighting poverty?
C.
What is the opportunity cost of building a new
Twins stadium? How many new businesses
will open if a new stadium is built?
D.
Which businesses will get more customers due to
the light rail transit line? How much of
the construction cost should they be forced to pay?
2. Which
of the following is true about different ways of reducing pollution?
A.
Pollution Tax requires less information to implement than
Auctioning Pollution Permits.
B. Both in case of Pollution Tax and Auctioning Pollution
permit , the firm with the lower cost of reducing pollution implements the
reduction.
C.
Direct Control requires EPA to know about cost structure of reducing
pollution of the firms.
D. Direct control is the best way of reducing
pollution.
3.According to our
discussion in class on Public goods,
A.National defense is both rival
and excludable.
B.National defense is excludable,
but non-rival.
C.National defense is both
non-rival and non-excludable.
D.National defense is rival , but not excludable.
4.In a
competitive market, subsidies to producer
A. Decreases both Producer Surplus and
Consumer Surplus.
B.Decreases
Consumer surplus, but increases producer surplus, but government earns positive
revenue.
C.Increases both Producer’s Surplus and Consumer Surplus.
D. Decreases Consumer surplus, but
increases producer surplus, but government has positive expenditure.
5. Once free trade is allowed between two
countries,
A.
Welfare of the country that imports goods increases, but welfare of the country
that exports goods decreases.
B. Welfare
of the country that imports goods decreases, but welfare of the country that
exports goods increases.
C. Welfare
of both countries remains the same as before.
D. Welfare
of both the countries increases.