International economics

Question 1
Assume a two-country (Home and Foreign) two-goods (Wheat and Cloth) world where labour is the only productive factor.
a) Following the Ricardian comparative advantage theory, carefully explain how the trade patterns can be predicted via production decisions given the consumer’s preference.What are the implications of trade for workers and consumers?

b) Suppose in the trade equilibrium the Home economy exports Wheat and Foreign exports Cloth. Explain how an increase in the world relative price of Wheat will raise Home's utility.

c) Following b), explain what would happen to the Foreign’s utility. What would happen if the price of Wheat is finally higher than the Foreign economy’s autarky price?

Question 2
Consider a two-goods (Food and Cloth), three-factors (Labour, Capital and Land) world. Assume that land is specific to the Food sector while capital is specific to the Cloth sector, and labour is freely mobile between the two sectors.
a) Utilise the specific-factor model and explain how the allocation and income of factors in equilibrium can be determined. What would happen if the country opens to trade and hence one of the good’s price increases?

b) Consider a decrease in the stock of Land due to a natural disaster. Explain the impacts on the allocations and incomes of the productive factors between the two sectors.

c) Suppose that the economy later receives some FDI into the Cloth sector as international assistance. Explain the effect of this policy on the equilibrium wage and rentals.

Question 3
Consider monopolistic competition among symmetric firms within the same industry. Suppose the cost function for each firm is l = wq + T where q is the firm’s output, w is the marginal cost and F represents the fixed cost. Assume that the demand function is q = C[1/N - σ(p-P)] where C is the total output of the industry; N is the number of firms within the industry; p is the price charged by the firm; P is the industry average price; and σ is a positive constant.
a) Derive the average cost of a typical firm and explain how it changes with the industry size C given the number of firms N is fixed.

b) Derive the optimal price for the monopolistically competitive firms and explain how it changes with the number of firms N. (Hint: You may utilise the fact that the marginal revenue of a monopolist firm can be written as MR = P - Q/B,if the demand can be written as D = A – BQ)

c) Derive the number of firms under the long-run equilibrium and illustrate how adjustments occur from the short-run to the long-run equilibrium.

d) Explain the effects of opening to trade so that there is an increase in market size (i.e. C increases).

Question 4
Consider monopolistic competition among heterogeneous firms. Suppose two typical firms have linear cost functions of which one has lower marginal cost than the other. Suppose that the two firms have the same demand curve, C[1/N - σ(p-P)] where C is the total output of the industry; N is the number of firms within the industry; p is the price charged by the firm; P is the industry average price; and σ is a positive constant.
a) Compare the two firms’ price, markup, output and their profits in equilibrium. Summarise the relation between the profit and marginal cost across the market.

b) Suppose that the economy opens to trade and hence both the market size and the number of firms rise (i.e. C and N increase). Explain the effects of trade on the firms’ demand curve and profitability conditions.

c) Suppose that an iceberg trade cost t will be added for exporting activities. Explain how an equilibrium would exist such that both firms will serve domestic market but only one ends up to export.

Question 5
Consider an economy imposing an export subsidy.
a) Assume that the economy is small so that changes in the terms of trade can be ignored. Explain the effects on trade volume and aggregate domestic welfare.

b) Assume that the economy is large and hence terms of trade will be affected. Explain the effects on trade volume and aggregate domestic welfare and compare the social welfare with the case where the country imposes a positive import tariff.

c) Following a), suppose instead that the government provides the subsidy for every unit that the Home firms produce. Illustrate the welfare implications of this production subsidy and compare them with the case with the export subsidy.
barbecuemocha
Asked May 25, 2017

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