Inlbu ernational-trade-theory-policy-tutorial-work-t-7-9 PDF

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International Trade Theory & Policy - Tutorial work - T 7 9

International Trade Theory & Policy (University of Queensland)

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Tutorial)Session)7) ! 1.)Consider!Portugal!and!Spain!in!a!H3O!world.!Both!countries!use!two!factors!of!production,! labour!and!capital!in!the!production!of!their!goods.!Portugal!is!the!relatively!labour!abundant! country.!Use!a!graphical!analysis!to!show!how!the!world!total!output!and!real!wages!change! with!immigration!of!labour!between!Portugal!and!Spain.!Discuss!how!both!countries!may!gain! from!labour!migration.! ! ! 2.!Suppose!that!costs!are!represented!by!C!=!F!+!cQ.!! i. What!is!the!average!cost?!! ii. What!is!the!marginal!cost?!! iii. Draw!the!marginal!and!average!cost!curves.!! ! ! 3.! Consider! the! soft! drink! industry! in! Australia! as! a! monopolistically! competitive! sector.! In! autarky,!a!typical!firm!is!characterized!as!follows:! !AC)=)(F/S))n)+)c,!where!P=AC! )P)=)c)+)1/(bn)!! Assume&b=1/2,&c=0.4,&F=$10,000,&S=1,000,000&units&& ! i. Calculate! the! equilibrium! number! of! firms! and! the! average! price! of! soft! drinks! in! free! trade.!!) ii. What!is!the!amount!produced!by!each!typical!firm!in!Autarky?!!! iii. Now! suppose! that! Australia! formed! an! FTA! with! US,! and! thus! the! size! of! the! market! doubled.!Calculate!the!free!trade!price!and!the!number!of!firms.!) iv. What!is!the!amount!produced!by!each!typical!firm!in!free!trade?!! v. Show!the!welfare!effects!going!from!Autarky!to!free!trade!for!Australia!in!this!case.! Provide!your!brief!explanation!and!fully!label!the!graph.! ! !

Tutorial)Session)7) ! 1.)Consider!Portugal!and!Spain!in!a!H3O!world.!Both!countries!use!two!factors!of!production,! labour!and!capital!in!the!production!of!their!goods.!Portugal!is!the!relatively!labour!abundant! country.Use!a!graphical!analysis!to!show!how!the!world!total!output!and!real!wages!change! with!immigration!of!labour!between!Portugal!and!Spain.!Discuss!how!both!countries!may!gain! from!labour!migration.! Answer:!Areas!“a”!and!“b”!are!the!net!increase!in!world!production.!In!this!case,!Spain’s! welfare!goes!up!due!to!increased!production.!If!workers!send!some!of!their!earnings! back!home!to!Portugal!(workers’remittances),!then!Portugal!would!benefit!too!(If!we! assume!they!send!all!the!money!back!to!Portugal,!area!“a”!is!the!gain!by!Spain!and!area! “b”!is!the!gain!by!Portugal.).!! Real!wage!in!Portugal!increases!with!emigration!(from!Real!Wage!Portugal!to!World!Wage)! and!real!wage!in!Spain!decreases!with!an!increase!labour!force!(from!Real!Wage!Spain!to! World!Wage).!Thus!real!wages!in!two!countries!are!equalized.!

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! 2.!Suppose!that!costs!are!represented!by!C!=!F!+!cQ.!! i. What!is!the!average!cost?!AC=F/Q+c! ii. What!is!the!marginal!cost?!MC=c! iii. Draw!the!marginal!and!average!cost!curves.!!

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Tutorial)Session)8) ! !Consider! the! soft! drink! industry! in! Australia! as! a! monopolistically! competitive! sector.! In! autarky,!a!typical!firms!are!characterized!as!follows:! !AC)=)(F/S))n)+)c,!where!P=AC! )P)=)c)+)1/(bn)!! Assume&b=1/2,&c=0.4,&F=$10,000,&S=1,000,000&units&& ! i. Calculate! the! equilibrium! number! of! firms! and! the! average! price! of! soft! drinks! in! Autarky.!! ! ii. What!is!the!amount!produced!by!each!typical!firm!in!Autarky?!! ! ! iii. Now!suppose!that!Australia!formed!an!FTA!with! the!US,!and! thus!the!size!of!the!market! doubled.!Calculate!the!free!trade!price!and!the!number!of!firms.!! ! iv. What!is!the!amount!produced!by!each!typical!firm!in!free!trade?!! ! ! v. Draw!a!diagram!to!show!the!longJrun!monopolistic!competition!equilibrium!in!Australia! without! trade.! Fully! label! the! graph.! (The! diagram! should! include! the! marginal! cost! curve,!average!cost!curve,!demand!curve,!and!marginal!revenue!curve.)!! ! vi. Draw!a!diagram!to!show!the!longJrun!monopolistic!competition!equilibrium!in!Australia! with!trade.!Explain!your!diagram!and!fully!label!the!graph.! ! ! vii. Use!a!diagram!to!show!the!welfare!effects!going!from!Autarky!to!free!trade!for! Australia.!Provide!your!explanation!and!fully!label!the!graph.! ! !

Tutorial)Session)8) ! !Consider! the! soft! drink! industry! in! Australia! as! a! monopolistically! competitive! sector.! In! autarky,!a!typical!firms!are!characterized!as!follows:! !AC)=)(F/S))n)+)c,!where!P=AC! )P)=)c)+)1/(bn)!! Assume&b=1/2,&c=0.4,&F=$10,000,&S=1,000,000&units&& ! i. Calculate! the! equilibrium! number! of! firms! and! the! average! price! of! soft! drinks! in! Autarky.!!nA=14,'PA=$0.54) ii. What!is!the!amount!produced!by!each!typical!firm!in!Autarky?!!Q1=1)million/14=71,429! iii. Now!suppose!that!Australia!formed!an!FTA!with!the!US,!and!thus!the!size!of!the!market! doubled.!Calculate!the!free!trade!price!and!the!number!of!firms.!nT=20,'PB=$0.50) iv. What! is! the! amount! produced! by! each! typical! firm! in! free! trade?! Q=2) million/20=100,000.! v. Draw!a!diagram!to!show!the!longJrun!monopolistic!competition!equilibrium!in!Australia! without! trade.! Fully! label! the! graph.! (The! diagram! should! include! the! marginal! cost! curve,!average!cost!curve,!demand!curve,!and!marginal!revenue!curve.)!! ! Answer:'PA=$0.54,)Q1=71,429!

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vi. Draw!a!diagram!to!show!the!longJrun!monopolistic!competition!equilibrium!in!Australia! with!trade.!Explain!your!diagram!and!fully!label!the!graph.! ! Answer:! As! more! of! varieties! are! available! to! consumer! after! trade,! their! demand! for! each!variety!will!be!more!elastic.!Thus,!the!firm’s!demand!curve!becomes!flatter!(from! d1!to!d2).!! D/NTB!!is!the!demand!a!firm!faces!when!all!firms!in!the!industry!charge!the!same!price.! As!some!firms!leave!in!the!shortJrun,!NTBD/NA!.!Thus,!the!demand!D/NTB! lies!to!the!right!of!the!demand!D/NA.! With! trade,! the! market! size! becomes! double,! but! as! some! (unproductive)! firms! leave! after! trade,! each! firm! produces! more! and! average! costs! decline! due! to! economies! of! scale.!In!the!longJrun,!the!price!is!equal!to!average!costs,!and!the!declined!average!costs! drive! the! price! down.! The! number! of! varieties! available! in! Australia! increases! as! products!from!the!US!are!available.!! ! PB=$0.50)Q2=100,000.! ! !

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vii. Use!a!diagram!to!show!the!welfare!effects!going!from!Autarky!to!free!trade!for! Australia.!Provide!your!brief!explanation!and!fully!label!the!graph.! Answer:!Australia’s!welfare!increases!due!to!a!decrease!in!the!price!and!an!increase!in! varieties!of!soft!drinks.!The!price!of!goods!falls!from!P1!(=PA)=$0.54!to!P2!(=PB!)=$0.50! and!the!number!of!varieties!available!in!the!economy!increases!from!n1(=nA!)=14!to!n2! (=nT!)=20.! !

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Tutorial)Session)9) ) 1. In)monopolistic)competition)in)international)trade,)when)Home)and)Foreign)start)to)trade) (a) The)number)of)firms)in)the)same)industry)in)the)world)decreases.) (b) Each)firm)will)produce)the)smaller)amount.) (c) The)number)of)firms)survived)in)the)market)would)be)smaller)than)the)number)of)firms)exited) the)market)after)trade.) (d) The)number)of)goods)produced)in)Foreign)must)increase.)) (e) None)of)the)above.) ) ) 2. Consider)two)economies,)A)and)B)with)monopolistically)competitive)clothing)industries.)A)and)B) produce)5)and)10)brands)of)clothing)in)autarky,)respectively.)The)average)industry)price)of)clothing) in)each)country)in)autarky)is)$20)per)unit.)If)free)trade)in)clothing)takes)place)between)the)two) economies,)you)would)expect) (a) The)total)number)of)brans)available)to)consumers)in)country)A)to)be)15)and)the)average)price) to)be)less)than)$20)per)unit)of)clothing.) (b) The)total)number)of)brans)available)to)consumers)in)country)A)to)be)between)5)and)15)and)the) average)price)to)be)less)than)$20)per)unit)of)clothing.) (c) The)total)number)of)brans)available)to)consumers)in)country)B)to)be)more)than)15)and)the) average)price)to)be)less)than)$20)per)unit)of)clothing.) (d) More)of)brands)to)be)produced)in)country)B)after)free)trade.) (e) Two)out)of)(a),)(b),)(c),)and)(d))are)correct.) ) ) 3. A)monopoly)firm)will)maximize)profits)by)producing)where) (a) Marginal)revenue)is)the)same)in)domestic)and)foreign)markets.) (b) Prices)are)the)same)in)domestic)and)foreign)markets.) (c) Total)revenue)from)domestic)and)foreign)sales)is)maximized.) (d) Marginal)revenue)is)higher)in)foreign)markets.) (e) None)of)the)above)is)correct.) ) ) 4. Japan)is)suspected)of)dumping)flat)panel)displays)(FPD))produced)by)a)large)corporation)in)that) country)onto)the)U.S.)market.))Assume)that)the)US)market)is)perfectly)competitive.) ) a. Draw)a)diagram)of)"monopoly")production)and)pricing)of)FPD)in)Japan)and)show)a)case)of)t) dumping)on)your)diagram.)) b. Indicate)the)equilibrium)point)in)the)Japanese)market)before)dumping.)Call)it)“b”.) c. Indicate)the)total)output)of)the)Japanese)firm)with)dumping.)) d. Indicate)the)domestic)sale)and)sale)in)the)US)market)of)the)Japanese)firm)with)dumping.)) ) ) 5. A)monopolist)firm)in)an)economy)faces)the)following)demand)curve:) Q'='48'+'.02'P' ) The)total)cost)of)production)of)this)firm)is:) TC'='300Q'+'100Q2' Where%Q%is%the%level%of%production%of%this%good,%P%is%price%per%unit%and%TC%is%the%total%cost%of% production.% Distributing prohibited | Downloaded by Ara dadze ([email protected])

% a. Calculate)the)domestic)monopoly)price)and)output.)) ) b. Now)suppose)this)firm)is)engaged)in)dumping)in)free)international)competition.)The) international)price)of)this)good)is)$1800)per)unit.)Calculate)the)amount)of)exports)and)sales)at) home)and)the)price)charged)by)this)firm)at)home.)) ) ) c. %What)are)the)consumer)welfare)effects)of)dumping)for)i))the)economy)in)which)dumping)occurs,) ii))for)the)economy)where)the)monopoly)firm)is)located)and)where)the)market)is)protected.)In) what)sense)does)the)economy\in)which)dumping)occurs)\)would)consider)it)objectionable?)) ) )

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Tutorial)Session)9) ) 1. In)monopolistic)competition)in)international)trade,)when)Home)and)Foreign)start)to)trade) (a) The)number)of)firms)in)the)same)industry)in)the)world)decreases.) (b) Each)firm)will)produce)the)smaller)amount.) (c) The)number)of)firms)survived)in)the)market)would)be)smaller)than)the)number)of)firms)exited) the)market)after)trade.) (d) The)number)of)goods)produced)in)Foreign)must)increase.)) (e) None)of)the)above.) ) Answer:(a)+ ) 2. Consider)two)economies,)A)and)B)with)monopolistically)competitive)clothing)industries.)A)and)B) produce)5)and)10)brands)of)clothing)in)autarky,)respectively.)The)average)industry)price)of)clothing) in)each)country)in)autarky)is)$20)per)unit.)If)free)trade)in)clothing)takes)place)between)the)two) economies,)you)would)expect) (a) The)total)number)of)brans)available)to)consumers)in)country)A)to)be)15)and)the)average)price) to)be)less)than)$20)per)unit)of)clothing.) (b) The)total)number)of)brans)available)to)consumers)in)country)A)to)be)between)5)and)15)and)the) average)price)to)be)less)than)$20)per)unit)of)clothing.) (c) The)total)number)of)brans)available)to)consumers)in)country)B)to)be)more)than)15)and)the) average)price)to)be)less)than)$20)per)unit)of)clothing.) (d) More)of)brands)to)be)produced)in)country)B)after)free)trade.) (e) Two)out)of)(a),)(b),)(c),)and)(d))are)correct.) ) Answer:(b)+ ) ) 3. A)monopoly)firm)will)maximize)profits)by)producing)where) (a) Marginal)revenue)is)the)same)in)domestic)and)foreign)markets.) (b) Prices)are)the)same)in)domestic)and)foreign)markets.) (c) Total)revenue)from)domestic)and)foreign)sales)is)maximized.) (d) Marginal)revenue)is)higher)in)foreign)markets.) (e) None)of)the)above)is)correct.) ) Answer:(a)+ ) ) ) 4. Japan)is)suspected)of)dumping)flat)panel)displays)(FPD))produced)by)a)large)corporation)in)that) country)onto)the)U.S.)market.))Assume)that)the)US)market)is)perfectly)competitive.) ) a. Draw)a)diagram)of)"monopoly")production)and)pricing)of)FPD)in)Japan)and)show)a)case)of)t) dumping)on)your)diagram.)) b. Indicate)the)equilibrium)point)in)the)Japanese)market)before)dumping.)Call)it)“b”.) c. Indicate)the)total)output)of)the)Japanese)firm)with)dumping.)) d. Indicate)the)domestic)sale)and)sale)in)the)US)market)of)the)Japanese)firm)with)dumping.))

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) 5. A)monopolist)firm)in)an)economy)faces)the)following)demand)curve:) Q'='48'+'.02'P' ) The)total)cost)of)production)of)this)firm)is:) TC'='300Q'+'100Q2' Where%Q%is%the%level%of%production%of%this%good,%P%is%price%per%unit%and%TC%is%the%total%cost%of% production.% % a. Calculate)the)domestic)monopoly)price)and)output.)) For%the%domestic%monopoly%price,%write%P%=%48/.02%D%Q/.02% b. P%=%2400%D%50Q%%% c. Hence,%TR%=%2400%Q%D%50Q2%and%MR%=%2400%D%100Q% d. TC%=%300%Q%+%10%Q2% e. MC%=%300%+%200Q% f. Since%MR%=%MC,%2400%D%100Q%=%300%+%200%Q;%Q%=%7%units% g. Plugging%this%into%the%equation%P%=%2400%D%50Q%%% h. We%get%P%=%2400%D%50%(7)%=%$%2050%per%unit.% ) ) i. Now)suppose)this)firm)is)engaged)in)dumping)in)free)international)competition.)The) international)price)of)this)good)is)$1800)per)unit.)Calculate)the)amount)of)exports)and)sales)at) home)and)the)price)charged)by)this)firm)at)home.)) )In%this%case,%MC%=%MR%in%international%market%=P%in%international%market.% Thus,%300%+%200Q%=%1800.%%Q,%total%output%=%7.5%units% % To%see%how%much%of%this%is%sold%at%home%and%how%much%is%exported,% MR%in%domestic%market%=%MR%in%international%market%=%MC=1800% MR%in%domestic%market%=%2400%D%100QDOM%=%1800.% So,%Q%=%6%units%are%sold%at%home.% This%implies%1.5%units%are%exported.% Domestic%price%level%P%=%2400%D%50Q%=%2400%D%50%*%6%=%$%2100%per%unit% Distributing prohibited | Downloaded by Ara dadze ([email protected])

% If%you%compare%this%price%($%2100%per%unit)%with%the%price%before%dumping%($2050%per%unit),%you’ll% see%the%domestic%price%with%dumping%is%also%higher.% ) ) j. +What)are)the)consumer)welfare)effects)of)dumping)for)i))the)economy)in)which)dumping)occurs,) ii))for)the)economy)where)the)monopoly)firm)is)located)and)where)the)market)is)protected.)In) what)sense)does)the)economy]in)which)dumping)occurs)])would)consider)it)objectionable?)) ) As%dumping%creates%some%competition%for%the%firm%in%the%economy%where%dumping%occurs,%it%may% lower%the%price%charged%to%consumers.%So%consumer'welfare'in'the'foreign'country%may%go%up.% However,%consumers'lose'in'the'protected'domestic'economy,%as%the%price%charged%by%the%firm% exceeds%both%the%monopoly%price%and%of%course,%the%free%trade%price.% % As%there%are%economic%profits%in%operation%of%large%(monopoly)%firms,%the%firms%in%the%protected% market%may%have%an%unfair%advantage%in%grabbing%these%profits.%%Especially,%where%there%are% economies%of%scale%in%production%and%AC%falls%with%greater%volume%of%output%and%sales,%then%the% firms%in%the%unprotected%market,%Dwhere%dumping,%occursD%may%find%themselves%in%a% disadvantageous%position%as%they%cannot%produce%more%and%export%to%the%other%country%market% and%hence%cannot%lower%their%AC%through%higher%level%of%production.%They%lose%"in%competition"% to%the%other%firms.%% ) )

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