Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she has and y is the amount of money she has per year to spend on other stuff, Ethel's utility function is U(x; y) where U(0; y) = (y)^1/2; U(1; y) = (15/14)y^1/2; and U(2; y) = (10/9)y^1/2. Suppose that it costs $2000 a year to have 1 car and $4000 a year to have 2 cars.
1. Explain why growth based only a growing labor force can an average leave people less well-off. Would your answer be different if there were increasing returns to scale?
2. There was sluggishness in the Japanese economy in the 1900s, and Japan's terms of trade improved at the same time. Can you interpret and analyze this experience in the context of what you have studied in this chapter? Explain.
3. Explain how the production-possibilities frontier of the unified Germany might differ from the PPF of the former Federal Repblic of Germany (west Germany).
4. If a small country cannot influence its terms of trade, why is it that small developing countries may have experienced a decline in their terms of trade over time?
5. Suppose in a small country, that under free trade a final good F has a price of $5100, that the prices of the only 2 inputs to good F, good A, good B are Pa = $300 and Pb =$500. And that 1 unit each of A and B is used to producing 1 unit of good F. suppose also that an ad valorem tariff of 20 percent is placed on good F, while imported goods A and B face ad valorem tariffs of 20 percent and 30 percent, respectively. Calculate the ERP for the domestic industry producing good F, and interpret the meaning of this calculated ERP.
6. Suppose that a country announces that it is moving toward free trade by reducing its tariffs in intermediate inputs while maintaining its tariffs on final goods. What is your evaluation if the announced "free-trade" direction of the country's policy?
7. The nominal tariff rates on the 10 imports into the fictional country of Tarheelia, as well as the total import value of each good, are listed here:
(a) Compute the unweighted-average nominal tariff rate for Tarheelia nominal tariff rate for Tarheelia.
(b) Calculate the weighted-average
8. Suppose that the free-trade price of a good is $12 and a 10 percent ad valorem tariffs is put in place. As a result, domestic production in a small country rises from 2000units to 2300 units and imports fall from 600 units to 200 unit. Who are the winner and losers? What is the size of their gains and losses? What is the net effect on society
9. Using the example in Question 1, how does an equivalent subsidy to the import-competing producer affect the market? What is the cost to the government of the subsidy? Which policy would consumers prefer, the tariff or the subsidy?
10. If you were an import-competing producer in a growing market, which trade instrument would you prefer - a tariff, an import quota, or a subsidy? Why?