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Homework 7

The document outlines a homework assignment focused on analyzing the global economy, specifically regarding trade policies such as import quotas, tariffs, and voluntary export restraints. It includes various questions related to the market for T-shirts and cars, requiring students to draw supply and demand diagrams, calculate prices, and assess the economic impact of trade barriers. Additionally, it addresses the costs of tariff protection and the effects of subsidies on domestic production.

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14 views3 pages

Homework 7

The document outlines a homework assignment focused on analyzing the global economy, specifically regarding trade policies such as import quotas, tariffs, and voluntary export restraints. It includes various questions related to the market for T-shirts and cars, requiring students to draw supply and demand diagrams, calculate prices, and assess the economic impact of trade barriers. Additionally, it addresses the costs of tariff protection and the effects of subsidies on domestic production.

Uploaded by

jiahuijiang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The Global Economy Scott A.

Redenius

HOMEWORK 7

Due date: As posted.


Where: Submit through Gradescope.

Instructions: Complete the requested analysis and be sure to show your work. Please write your answers on a
clean sheet of paper or type them in a document separate from the homework assignment itself.
You can work on the homework with other students in Econ 28b. But what you turn in must represent
your own work, not simply a copy of another student’s assignment.

Each part is worth 3 points unless otherwise noted. There are a total of 60 points. Assume there are no
transportation costs and no trade barriers unless otherwise stated.

1. The graph above represents the market for T-shirts in Country A, a small country. Assume that there is
free trade with the rest of the world (and no transportation costs) and that the world price of a T-shirt is
$10.00.

a. Redraw the supply and demand diagram for the domestic market with trade. Label the relevant
prices and quantities, e.g., the domestic price, production, and consumption.
b. Draw a supply and demand diagram for the international market. Label the relevant prices and
quantities and the price-intercepts.

Country A’s government now imposes an import quota of 16K T-shirts.


c. Redraw the supply and demand diagram for the domestic market showing the impact of the
quota. Label the relevant prices and quantities, e.g., the domestic price, production, and
consumption.
d. Redraw the supply and demand diagram for the international market showing the impact of the
quota. Label the relevant prices and quantities and the price-intercepts.
e. Label the area corresponding to the quota revenue in your diagrams for parts (c) and (d).
f. What tariff imposed on imported T-shirts would be equivalent, i.e., have the same effect, as the
quota? Briefly explain.
g. What would the price in the domestic market be if the quota were increased to 26K T-shirts?
How many T-shirts would be imported? Briefly explain.

Instead of using an import quota or tariff to protect the domestic T-shirt industry, Country A’s
government gets the ROW’s government to agree to a voluntary export restraint (VER) that restricts
exports to 12K T-shirts. The ROW’s government auctions off the export licenses to the highest bidder.

h. What is the highest price a T-shirt exporter in the ROW would be willing to pay for an export
license (per T-shirt) auctioned off under the VER?
i. Use your answer in part (h) to compute the total revenue the ROW’s government could get from
the sale of export licenses for the 12K T-shirts.

2. In Germany, the price of Car A is $60,000 and Car B $30,000, so Car A is twice as expensive as Car B.

a. The U.S. (a small country) imposes an ad valorem tariff on car imports of 30%.
(i) What will be the U.S. price of Car A? (Give a $ value.)
(ii) What will be the U.S. price of Car B? (Give a $ value.)
(iii) In the U.S. market, is Car A still twice as expensive as Car B?
b. The U.S. (a small country) imposes a specific tariff on car imports of $12,000.
(i) What will be the U.S. price of Car A? (Give a $ value.)
(ii) What will be the U.S. price of Car B? (Give a $ value.)
(iii) In the U.S. market, is Car A still twice as expensive as Car B?
c. Suppose inflation increases the prices of the cars to $90,000 for Car A and $45,000 for Car B.
As in part (b), the U.S. (a small country) has a specific tariff on car imports of $12,000.
(i) What will be the U.S. price of Car A? (Give a $ value.)
(ii) What will be the U.S. price of Car B? (Give a $ value.)
(iii) How has the U.S. price of Car A changed relative to Car B compared to part (b).

3. A small country’s barriers to trade can be summarized as follows: An import tariff on all imports of 12
percent reduces imports by 24 percent. The country’s GDP is $200B. Under free trade, the country’s
imports are $80B. What are the costs of the tariff protection as a percentage of GDP?
4. The diagram above represents the market for T-shirts in Country B, a small country. Assume that the
world price of a T-shirt is $11.

a. What is the marginal external benefit (MEB) of the last T-shirt produced within the domestic
economy? (Give a $ value.)
b. What is the total external benefit from domestic production of T-shirts? (Give a $ value.)

Now suppose the government gives a $4 subsidy for domestic T-shirt production ($ per T-shirt).

c. How much does Country B T-shirt production increase because of the subsidy?
d. How much does the government spend on the production subsidy? (Give a $ value.)
e. How much does producer surplus change as a result of the production subsidy? (Give a $ value.)
f. What net effect does the subsidy have on Country B’s welfare? (Give a $ value.)

5. True/False. For each part, explain your answer. Why is it true or why is it false?

a. A voluntary export restraint (VER) is not only a politically attractive way of offering protection
to an import-competing industry but is also economically less harmful to the importing country
than other trade barriers would be.

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