Final Exam December 16, 2008 - University of Michiganalandear/courses/541/exams/xm2-f08.pdfFinal...

SPP/Econ541 AlanDeardorffFallTerm2008 FinalExam Page1of3

FinalExamDecember16,2008

Answerinbluebook.Usethepointvaluesasaguidetohowextensivelyyoushouldanswereachquestion,andbudgetyourtimeaccordingly.Theexamhasatotalof60points.1. (8points)InJulyof2008,theDohaRoundnegotiationsbrokedown.Intwo

paragraphs,describefirstthemajorissuesthathaddividedthecountriesthroughoutthenegotiations,andsecondthespecificissueonwhichtheirfailuretoagreeinJulyprecipitatedthebreakdown.

2. (9points)Inthefigureareshowndomesticdemandanddomesticmarginalcost

inanindustryofasmallopeneconomythatfacesaworldprice

€

PW ofthisgood.Themarginalcostcurvemayrepresentthatofaperfectlycompetitiveindustrywithlotsofdomesticfirms,inwhichcaseMCisthecompetitivesupplycurve.Or,inadifferentcase,MCmaybethemarginalcostofasinglefirm,theonlyfirmproducingthegoodinthecountry.Inbothcases,initiallythecountryislevyingatariffof

€

t0 ,thedomesticpriceis

€

PW + t0 whichhappenstobeattheintersectionofDandMC,andthecountryisthusbothproducingandconsumingthequantity

€

Q0 .Supposenowthatthecountryincreasesitstarifftothelevel

€

t1shown.Explainwhathappens,asaresult,first(Case1)undertheassumptionthattherearealargenumberofcompetitivedomesticfirmswithsupplycurveMC,andsecond(Case2)undertheassumptionthatthereisonlyasingledomesticfirmwithmarginalcostcurveMC.Specifically,saywhathappensto

a. Domesticpriceb. Domesticproductionc. Domesticconsumptiond. Producerwelfaree. Consumerwelfaref. Governmentrevenueg. Welfareofthecountryasawhole

SPP/Econ541 AlanDeardorffFallTerm2008 FinalExam Page2of33. (10points)Usethemonopolisticcompetitionmodel(reminder:it’sthemodel

whosediagramappearsbelow)toshowwhatwillhappen…a. Iftwoidenticalcountriesmovefromautarkytofreetrade

i. Toprice;ii. Tothenumberoffirmsfromwhichconsumerscanbuy;andiii. Tothenumberoffirmsineachcountry.

b. If,startingfromfreetrade,thereisafallinthemarginalcostofproduction

(thesameineachfirm)i. Toprice;ii. Tothenumberoffirms.

4. (9points)Consideradomesticmonopolythatisprotectedbyaveryhightarifffromcompetitionfromacompetitiveforeignmarket,sothatitcanchargeonepriceinitshomemarketandanotherabroad.Assumethatthefirm’smarginalcostisconstantandthatallsupplyanddemandcurvesarelinear.

a. Showanequilibriuminwhichthefirmengagesindumping.

b. Ifthefirmwerenowconfrontedwithananti‐dumpingstatuteanditwished

toavoidbeingsubjectedtoananti‐dumpingduty,howwoulditalteritsbehavior?Besuretoshowacaseinwhichitcontinuestoservebothmarkets.

SPP/Econ541 AlanDeardorffFallTerm2008 FinalExam Page3of35. (24points)SupposeyouaretheUSITCtryingtodecideasafeguardcaseinthe

UnitedStatesbroomindustry.YousomehowknowthatsupplyelasticityoftheUSbroommanufacturers(whoarenumerousandplausiblyperfectlycompetitive)is+2.0,butyouhavebeengiventwodifferentestimatesoftheUSelasticityofdemandforbrooms:–1.0and–3.0.Theworldpriceofbroomshasrecentlyfallenfrom$5.00to$4.00,atwhichpricetheindustryisnowproducing8.0millionbroomsdomesticallyandimporting72.0millionbrooms.Assumethatdomesticandimportedbroomsareidenticaland,exceptwheretoldotherwise,thatthesequantitiesareanegligiblepartoftheworldmarketforbrooms.

Answerthefollowingquestions,givingtwoanswerstoeachiftheydependupontheelasticityofdemand,oneforeachofthetwoelasticitiesabove.(Ifyouhavetroublewithpartsofthequestion,goaheadandanswerotherpartsevenifyouneedtomakeupanswerstoworkwith.Iwillthengradebasedonthosemade‐uporincorrectanswers.)

a. Assumingthatemploymentintheindustryisproportionaltooutput,bywhat

percentagedidemploymentrecentlydrop?

b. WhatsizeadvaloremtariffshouldtheITCrecommendifitwishestorestoreemploymenttowhatitwasbefore?HowwouldyouranswerdifferifyouthoughtthatUSdemandforbroomswasalargepartoftheworldmarket?

c. Usingthetariffyouspecifiedinthefirstpartof(b),bywhatpercentagedoesthedemandforbroomsdeclineasaresultofthetariff?Also,bywhatpercentagedoestheUSdemandforimportsofbroomsdeclineasaresultofthetariff?

d. Fromyouranswertopart(c),whatistheelasticityofdemandforimports?Howdoesitcomparetotheunderlyingelasticitiesofsupplyanddemand,andwhy?

e. Againusingthetarifffromthefirstpartof(b),calculatethechangeinconsumersurplusduetothetariff.Explainwhyconsumersarehurtlessinoneelasticitycasethanintheother.

f. Whatisthenetwelfarecosttothecountryofusingthistariff?Again,explainwhythecountryishurtlessinoneelasticitycasethanintheother.

g. Whatpolicy,otherthanatariff,couldachievethesamerestorationofbroom‐industryemploymentbutatlowercosttotheeconomyasawhole?

h. Discussbrieflytwootherpolicies,bothofwhichappearinUSlaw,bywhichthisdisruptiontothebroomindustrymightbedealtwith.