1) There is a small country whose domestic demand and supply for a good x are given below (where P is the price of X) [drawing a demand and supply graph may be helpful to you, but is not required.]
D: P=100-Q
S: P=10+2Q
a) In autarky what is the equilibrium price and quantity of X.
Suppose that this small country opens up to world trade and the prevailing world price is 60.
b)Is this country an exporter or an importer of X and what is the volume of trade?
c) Do consumers gain or lose? What is the change in consumer surplus?
d) Do producers gain or lose ? What is the change in producer surplus?
e)Is there a net welfare gain or loss from trade? What is the change in welfare?
Suppose that this small country opens up to world trade and the prevailing world price is 80(instead of 60)
f) Is this country an exporter or an importer of x and what is the volume of trade? Is there a net welfare gain or loss from trade? How much is the net welfare change?
2) Using the following information on the US market for canned tuna, answer the questions below. With no imported tuna(autarky), the price of canned tuna in the US is $1.60 per lb., and the quantity produced and consumed is 570 million lbs.With free trade in canned tuna, the US price drops to $1.50 per lb. At this price only 500 million lbs. is produced in the US, but the US consumes 800 million lbs.
a) Show the information above on a supply and demand graph . Be sure to label all the known points clearly.
b) What is the volume of imports under free trade? By how much is domestic production reduced?
c) If going from autarky to free trade,do consumers gain or lose? What is the change in consumer surplus?
d) If going from autarky to free trade, do producers gain or lose? What is the change in producer surplus?
e) If going from autarky to free trade, is there a net welfare gain or loss? What is the change welfare?
3) Angola (or country A) and Botswana(or country B ) both produce cloth and food using labor. The input
Coefficients for Angola are ALC=4 and ALF=8. In Botswana it takes three times as much labor to produce cloth and twice as much labor to produce food as in Angola.
a) What are the input coefficients for Botswana?
b) Which country has the absolute advantage in the production of cloth? Explain
c) Which country has the absolute advantage in production of food ? Explain
d) Which country has the comparative advantage in the production of cloth? Explain
e) Which country has the comparative advantage in the production of food? Explain
f) What is the feasible range for (PC/PF)tt when the two countries trade with one another?
g) What does Angola export?
h) What does Botswana export?
i) Suppose that Angola has an endowment of 400 labor units. Draw Angola's PFF. Label the axes and indicate the values of the intercepts. Draw a feasible terms of trade line( For trade with Botswana) on the graph and indicate the slope value.
4) Two countries, Spain and Portugal, use two inputs, capital and labor, to produce two goods, wine and cheese. Wine is relatively capital intensive in production and Spain is the relatively capital abundant country.
a) State the heckschel-ohline theorem. According to the theorem, predict which country will export cheese? Which will export wine? State other assumptions necessary to draw a conclusion here.
b)label the graphs below to represent the PPF for each country. [hint: note that the left side is Spain and the right side is Portugal. Be sure to label your axes with the correct good, according the information given for each country.] Illustrate the autarky equilibrium( so that one can easily determine which country has the lower relative price in each good).Be sure to label the axes and other essential elements.
C) Add to your graphs above a feasible world free equilibrium (labeling essential elements). Be sure to illustrate the trade triangle for each country and show how each country gains from trade.