1. Demand for wheat in Home is given by P = 240 – 4QD and supply of wheat by Home producers is given by P = 4QS. The free trade world price of wheat is $160.
a. Solve for Home’s domestic production and consumption under free trade. Is Home a net importer or exporter? (2)
b. Suppose Home’s government decides to support Home wheat producers by giving an export subsidy of $40 (and restricts wheat imports at the same time). Assume Home is small in the world market for wheat. Please compute and show on a graph the quantities of wheat produced and consumed at Home and price of wheat in Home both in free trade with the export subsidy. (6)
c. Please compute and show on a graph the effect of the export subsidy on Home’s consumer surplus, producer surplus, and the government budget. What is the effect on Home’s welfare? (8)
d. Next assume that Home is large enough to affect the world price of wheat, and that as a result of the $40 export subsidy, the world price of wheat falls to $140. Please compute and show on a graph the quantities of wheat produced and consumed at Home and the price of wheat in Home with the export subsidy. (6)
e. Please compute and show on a graph the quantities of wheat produced and consumed at Home and price of wheat in Home both in free trade with the export subsidy under the assumption that Home is large in the world wheat market (setting in part d). (8)
2. Suppose Boeing and Airbus are competing in a market of an aircraft with demand P = 100 – QD. The fixed cost of production is 100 and marginal cost is 20. Suppose the market is perfect competitive when both firms are in the market, and when there is only one firm, that firm is able to price monopolistically.
a. Show that the entry decisions of the two firms constitute a game with the following payoff matrix: (6)
(Hint: compute each firm’s profits in different cases)
|Boeing||(Boeing, Airbus)||Produce||Not produce|
b. Which outcomes are Nash equilibria? Briefly explain. (4)
c. The European government commits itself to pay a lump sum production subsidy to Airbus. Show that the minimum lump sum production subsidy offered by EU that guarantees Airbus’s entry is 100. Write down the payoff matrix when the subsidy of 100 is given to Airbus. Under this case, what will be the outcome and net gain/loss for EU? (7)
d. What is a limitation of the above analysis on practical policy making? (3)
3. Answer the following questions about the American automobile industry in the 1980s.
ai. It is noted that US imported cars from Japan and exported cars to Japan (for your information, a Ford commercial in Japan is included on the next page). What is this trade pattern called? (2)
ii. What is the driving force for the trade pattern in part a? Is this trade pattern consistent with trade patterns as predicted by comparative advantage? (5)
iii. Suppose US and Japanese firms differ in production technologies such that Japanese firms have lower marginal costs in general. What are the effects of trade on different firms? Who are the winners and losers? (3)
The US government stipulated the Japanese to impose a voluntary export restrain on Japanese cars that limits the cars imported to US. The VER is estimated to cause a $10 billion surplus to related sectors in US. On the other hand, the consumer loss is estimated to be $13 billion.
b. If everyone has a vote to decide which policy to implement, explain what would the voted policy be according to the median voter theorem. Does the theorem predict that the VER will be enacted? How would you address the discrepancy of its prediction with the fact that VER is enacted? (5)
c. The estimation in the first research takes into account the increase in price and increase in profits for domestic producers, i.e. consumer and producer surpluses. There are claims that argue estimations based on economic models do not capture the true welfare effects. What are 2 examples of these social benefits that are not accounted? (4)
d. Some advocate for a production subsidy for domestic production and claim that it generates a higher welfare than the VER. Explain in words or show on a graph. (4)
e. Suggest another “first best” policy that can also stimulate domestic production of cars. (2)
4. Long Questions. Write one short paragraph for each of the following questions.
a. Explain why import-substituting industrialization and export-oriented growth cannot be carried out at the same time. Do you agree that trade policies contributed a major part to the growth of developing countries? Explain which regime you think works better in stimulating economic growth (explain too if your answer is neither). You may illustrate your argument with an exmaple of a developing country of your choice. (15)
b. Adding labor standard regulations is a trend in trade negotiations. For example, the TPP’s Labor chapter reiterates that all members should adopt and maintain the labor rights. It also calls for all participants to end child labor and forced labor, allow for collectively bargain, maintain a minimum-wage, and safety and health standards. Do you agree that these terms should be included as a part of trade agreements? Explain. (10)