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ECON 433: Advanced International Trade: Theory and PolicyInstructor: Konstantin StyrinProblem set 3due 1 May 2014 in classI. Import taris and quotas under perfect competition1. Rank the following in ascending order of Home welfare and justify your answers. If twoitems are equivalent, indicate this accordingly.a. Tari of t in a small country corresponding to the quantity of imports M.b. Tari of t in a large country corresponding to the same quantity of imports M.c. Tari of t in a large country corresponding to the quantity of imports M > M .2. No U. S. tire producers joined in the request for the tari on tires in 2009. Rather, thepetition for a tari on tires imported from China was brought by the United Steelworkers ofAmerican, the union who represents workers in the tire industry. Why did major tire manufactures operating in the United States, like Goodyear, Michelin, Cooper, and Bridgestone, notsupport the tari?3. Suppose Home is a small country. Use the graphs below to answer the questions.a. Calculate Home consumer surplus and producer surplus in the absence of trade.b. Now suppose that Home engages in trade and faces the world price, P ? = $6. Determinethe consumer and producer surplus under free trade. Does Home benet from trade? Explain.c. Concerned about the welfare of the local producers, the Home government imposes a tariin the amount of $2 (i.e., t=$2). Determine the net eect of the tari on the Home economy.4. Refer to the graphs in problem 3. Suppose that instead of a tari, Home applies an importquota limiting the amount foreign can sell to 2 units.1a. Determine the net eect of import quota on the Home economy if the quota licenses areallocated to local producers.b. Calculate the net eect of the import quota on Home’s welfare if the quota rents areearned by foreign exporters.c. How do your answers to parts (a) and (b) compare with part (c) of problem 3?II. Import taris and quotas under imperfect competition5. Rank the following in ascending order of Home welfare and justify your answers. If twoitems are equivalent, indicate this accordingly.a. Tari t in a small country with perfect competition.b. Tari t in a small country with a Home monopoly.c. Quota with the same imports M in a small country, with a Home monopoly.d. Tari t in a country facing a Foreign monopoly.6. Suppose the home rm is considering whether to enter the foreign market. Assume thatthe home rm has the following costs and demand:Fixed costsMarginal costsLocal priceLocal quantityExport priceExport quantity======$140$10 per unit$2520$1510a. Calculate the rm’s total costs from selling only in the local market.b. What is the rm’s average cost from selling only in the local market?c. Calculate the rm’s prot from selling only in the local market.d. Should the home rm enter the foreign market? Briey explain why.e. Calculate the rm’s prot from selling to both markets.f. Is the home rm dumping? Briey explain.III. Export policies in agriculture and high-tech7. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Homegrowers export 20 tons. Now suppose the Home government decides to support its domesticproducer with an export subsidy of $40 per ton. Use the following gure to answer thesequestions.2a. What is the quantity exported under free trade and with the export subsidy?b. Calculate the eect of the export subsidy on consumer surplus, producer surplus, andgovernment revenue.c. Calculate the overall net eect of the export subsidy on Home welfare.8. Refer to problem 7. Suppose Home is a small exporter of wheat. At the world price of$100 per ton, Home growers export 20 tons. But rather than an export subsidy, suppose theHome government provides its domestic producer with a production subsidy of $40 per ton.Use the following gure to answer these questions.3a. What is the quantity exported with the production subsidy?b. Calculate the eect of the production subsidy on consumer surplus, producer surplus,and government revenue.c. Calculate the overall net eect of the production subsidy on Home welfare. Is the cost ofthe production subsidy more or less than the cost of the export subsidy for the small country?Explain.9. Boeing and Airbus are the world’s only major producers of large, wide-bodied aircrafts.But with the cost of fuel increasing and changing demand in the airline industry, the needfor smaller regional jets has increased. Suppose that both rms must decide whether they willproduce a smaller plane. We will assume that Boeing has a slight cost advantage over Airbusin both large and small planes, as shown in the following payo matrix (in millions of U.S.dollars). Assume that each producer chooses to either produce only large, only small, or noplanes at all.a. What is the Nash equilibrium of this game?b. Are there multiple equilibria? If so, explain why. Hint: Guess at an equilibrium and thencheck whether either rm would want to change its action, given the action of the other rm.Remember that Boeing can change only its own action, which means moving up or down acolumn, and likewise, Airbus can change only its own action, which means moving back orforth on a row.c. Now suppose the European government wants Airbus to be the sole producer in thelucrative small-aircraft market. What is the minimum amount of subsidy that Airbus mustreceive when it produces small aircraft to ensure that outcome as the unique Nash equilibrium?d. Is it worthwhile for the European government to undertake this subsidy?IV. International agreements10. Consider the following variation of Table 11-1 in the textbook for the U. S. semiconductormarket.4a. Fill in the values for W, X, Y, and Z.b. Suppose that before NAFTA the United States had a 20% tari on imported semiconductors. Which country supplied the U. S. market? Is it the lowest cost producer?c. After NAFTA, who supplies the U.S. market? Has either trade creation or diversionoccurred because of NAFTA? Explain.d. Now suppose that before NAFTA, the United States had a 10% tari on importedsemiconductors. Then repeat parts (b) and (c).e. In addition to the assumptions made in (d), consider the eect of an increase in hightechnology investment in Canada due to NAFTA, allowing Canadian rms to develop bettertechnology. As a result, three years after the initiation of NAFTA, Canadian rms can beginto sell their products to the United States for $46. What happens to the U. S. trade patternthree years after NAFTA? Has either trade creation or diversion occurred because of NAFTA?Explain.5