Public Affairs 856 - Midterm Exam 2
Part I: Multiple Choice
1. Monopolistic competition is associated with
a. high profit margins.
b. None of the above.
c. product differentiation.
d. explicit consideration at firm level of the feedback effects of other firms' pricing decisions.
2. Intra-industry trade is most common in the trade patterns of
a. developing countries of Asia and Africa.
b. None of the above.
c. industrial countries of Western Europe.
d. North-South trade.
3. An Optimal Tariff
a. could theoretically happen when a small country levies a tariff.
b. refers to a situation when the imposition of a tariff lowers domestic prices.
c. refers to a situation when a tariff hurts a country's economic welfare.
d. None of the above.
4. Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain because of foreign
a. subsidies.
b. tariffs.
c. export quotas.
d. None of the above.
5. If a good is imported into (small) country H from country F, then the imposition of a tariff In country H
a. raises the price of the good in H and lowers it in F.
b. raises the price of the good in both countries ("the "Law of One Price").
c. raises the price in country H and cannot affect its price in country F.
d. lowers the price of the good in H and could raise it in F.
6. For a small country, the main redistribution effect of a tariff is the transfer of income from
a. domestic producers to domestic government and domestic buyers.
b. domestic government to domestic consumers.
c. domestic buyers to domestic producers and the government.
d. None of the above.
7. The Heckscher-Ohlin, factor-proportions model lends support to the argument that
a. Trade tends to worsen the conditions of workers in poor countries.
b. Trade tends to worsen the conditions of workers in rich countries.
c. Trade tends to reduce the relative wage of unskilled labor in rich countries.
d. Trade tends to worsen the conditions of owners of capital in rich countries.
Part II: Short Answers
1. Consider a large country in the world economy.
1. Draw a graph showing the home market and the world market for widgets. Carefully indicate the original level of imports, original consumer surplus, and original producer surplus.
2. Draw a graph showing the impact of applying a tariff, t, to imports of widgets. Carefully indicate the new level of imports.
3. Carefully indicate the consumer dead weight loss (DWL), the producer side DWL, and tariff revenue.
4. Under what condition is the country better off imposing the tariff? Be specific, with respect to indicated areas on the graph used to answer 3.
2. Figure 9-1 below shows the Home no-trade equilibrium under perfect competition (with the price PC), and under monopoly (with the price PM). In this question, compare the welfare of Home consumers in these two situations.
1. Under perfect competition, label consumer surplus and producer surplus.
2. Show the impact of a quota on consumer and producer surplus.
3. Redraw Figure 9-1. Under monopoly, label consumer and producer surplus.
4. Show the impact of a quota on consumer and producer surplus.
3. Consider this graph of the world economy, with the US as an importer of widgets, and with Mexico and Asia as exporters.
1. When the United States and Mexico join NAFTA, who supplies widgets to the United States? Show how many widgets are supplied by Mexico and by Asia.
2. What is the change in government revenue compared with before NAFTA?
3. What is the impact on consumer surplus? Show clearly the area in the graph representing the change in consumer surplus.
4. Is the US better or worse off entering into NAFTA, given the way this graph is drawn?