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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.