This problem set is due Thursday, March 30, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.

1. The following table gives Finland’s domestic demand and supply curves of Cruise Ships:

a) What are the autarky levels of domestic prices, production, and consumption in Finland?

b) Assume that Finland is a small country, that the international price of cruise ships is €160 million and that Finland engages in free trade. What are the levels of domestic prices, production, consumption, and exports in Finland?

c) The President of Finland, a big "Titanic" fan, decides that she wants to promote exports of cruise ships, and in order to do this she gives an export subsidy to domestic producers equal to €40 million for each cruise ship exported. What are the effects of this policy on the domestic prices, production, consumption, and exports in Finland? (Assume that Finland’s consumers cannot buy any cruise ships in the international market) Illustrate your answer with a diagram.

d) What is the effect of this policy on the international price of cruise ships?

e) Show in your diagram the losses to Finland’s consumers, the gains to its producers, the cost of the subsidy to the its Government, and the deadweight losses for the country as a whole.

2. Concentrate on the market for TV sets between the European Union and Mexico. Assume that TV sets are a homogeneous product produced under perfect competition and that there are only two countries in the world, the European Union (You can think of the EU as a single nation) and Mexico.

a) Assume that Mexico has a comparative advantage in the production of TV sets. Show the free-trade equilibrium for TV sets using the supply and demand for each country, as well as the export supply and import demand (Hint: You need to draw three diagrams). Show the EU’s domestic production and consumption under free trade.

b) Because of strong lobbying efforts by EU’s TV producers, the European Parliament’s President Nicole Fontaine agrees to protect EU’s domestic production from foreign competition. In a meeting with her economic advisors President Fontaine learns that the EU’s commitments to the WTO restrict her ability to impose tariffs or quotas on the Mexican imports. One of President Fontaine’s advisors suggests that a VER should be "negotiated" with Mexico to circumvent WTO regulations and at the same time obtain the desired protection to the domestic producers. After intense negotiations the Mexicans agree to "voluntarily" restrict their exports to the EU to 60% of the free trade equilibrium level. Use your diagram from part a) to show the effects of this VER on Mexico’s domestic price, domestic production, domestic consumption, and exports. Also show the effects of this change on the EU’s quantity of imports, price of imports, domestic production, and domestic consumption.

c) Show in your diagram the changes in welfare for each group (e.g., consumers, producers, etc.) in Mexico and the EU. Also show the net welfare effect of the VER on Mexico and the EU.

d) Which type of EU protection does Mexico prefer, Tariff, Quota, or VER? Why? What about the EU?

3. Colombia’s domestic demand and supply schedules for salmon are the following:

a) Assume Colombia is a small country, that it has no barriers to trade, and that the world price of a kilo of salmon is 6,000 pesos. Determine Colombia’s free-trade price and volume of salmon imports. Determine, also, Colombia’s domestic production and consumption of salmon. Illustrate your answers in a diagram.

b) In an effort to reduce the Chilean trade deficit, President Ricardo Lagos goes to several South American countries to try to "persuade" them to buy more Chilean products. During his stop in Colombia, he obtains a commitment from this country to increase their imports of Chilean salmon (assume that all salmon that Colombia imports is "produced" in Chile). In order to achieve this "Voluntary Import Expansion", the government of Colombia offers a 4,000 pesos rebate to anyone in that country that buys imported salmon. In other words, for each kilo of salmon imported, the buyer will receive a 4,000 pesos check from Colombia’s government. Determine the effects of this VIE on the domestic price, output, and consumption of salmon as well as Colombia’s volume of imports. Illustrate your answers in a diagram.

c) Show in your diagram the changes in consumer surplus, producer surplus and the cost of the VIE to the government. Also, show any deadweight losses associated with the imposition of the voluntary import expansion. Is Colombia better off or worse off as a result of the imposition of the VIE in the salmon industry.

4. Assume that Japan’s MP3 Player production is in the hands of a single corporation, Sony. You are hired as a consultant by Mr. Nobuyuki Idei, who is the Sony’s CEO. You are given the following information about the Demand and the Marginal Revenue schedules that this company faces on its sales in Japan and in the United States.

Furthermore, you are given the following schedule showing the marginal costs that this company faces:

a) How many MP3 players should Sony Corporation produce?

b) How many MP3 players should Sony sell in Japan, and how many should it sell in the U.S.?

c) What should the prices of Sony’s MP3 players in Japan and in the U.S. be?

d) Illustrate your answers to parts a, b, and c with a diagram.

e) Mr. Nobuyuki Idei wants to know if by following your advice from the previous questions his company could be charged with dumping in the U.S. What would you respond? Why? If your answer is yes, what type of dumping are you talking about?

f) If the U.S. decides to impose an antidumping duty on Sony’s MP3 players, how much should this dumping duty equal? Why?