Spring 2001	ECONOMICS 2318	J.G. Gonzalez
	Problem Set # 2

This problem set is due Thursday, March 29, 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 Russia’s domestic demand and supply curves of vodka:

Price (in Rubles)	Q. Demanded (units)	Q. Supplied (units)
370	800	2800
340	1000	2500
310	1200	2200
280	1400	1900
250	1600	1600
220	1800	1300
190	2000	1000

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

b) Assume that Russia is a small country, that the international price of vodka is 280 R (where R = Rubles) and that Russia engages in free trade. What are the levels of domestic prices, production, consumption, and exports in Russia?

c) Vladimir Putin, Russia’s President and a big vodka fan, decides that he wants to promote exports of vodka, and in order to do this he gives an export subsidy to domestic producers equal to 60 R for each bottle of vodka exported. What are the effects of this policy on the domestic prices, production, consumption, and exports in Russia? Illustrate your answer with a diagram.

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

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

2. Concentrate on the market for bananas between the European Union and Ecuador. Assume that bananas 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 Ecuador.

a) Assume that Ecuador has a comparative advantage in the production of bananas. Show the free-trade equilibrium for bananas 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 banana 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 Ecuadorian imports. One of President Fontaine’s advisors suggests that a VER should be "negotiated" with Ecuador to circumvent WTO regulations and at the same time obtain the desired protection for the domestic producers. After intense negotiations the Ecuadorians agree to "voluntarily" restrict their exports to the EU to 50% of the free trade equilibrium level. Use your diagram from part a) to show the effects of this VER on Ecuador’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 Ecuador and the EU. Also show the net welfare effect of the VER on Ecuador and the EU.

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

3. Singapore's domestic demand and supply schedules for cellular phones are the following:

Price (in S. Dollars)	Q. Demanded (units)	Q. Supplied (units)
200	2,000	2,000
180	2,500	1,800
160	3,000	1,600
140	3,500	1,400
120	4,000	1,200
100	4,500	1,000
80	5,000	800
60	5,500	600
40	6,000	400

a) Assume Singapore is a small country, that it has no barriers to trade, and that the world price of a cellular phone is S$ 140. Determine Singapore's free-trade price and volume of cellular phone imports. Determine, also, Singapore's domestic production and consumption of cellular phones. Illustrate your answers in a diagram.

b) In an effort to reduce the Finnish trade deficit, President Tarja Kaarina Halonen (Finland’s President) goes to several Asian countries to try to "persuade" them to buy more Finnish products. During her stop in Singapore, she obtains a commitment from this country to increase their imports of Finnish cellular phones (assume that all cellular phones that Singapore imports are made in Finland). In order to achieve this "Voluntary Import Expansion", the government of Singapore offers a S$ 60 rebate to all consumers in this country that buy an imported cellular phone. In other words, for each cellular phone imported, a consumer will receive a S$ 60 check from Singapore's government. Determine the effects of this VIE on the domestic price, output, and consumption of cellular phones as well as Singapore'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 Singapore better off or worse off as a result of the imposition of the VIE in the cellular phone industry.

4. The U.S. Association of Steel Producers has filed a petition with the International Trade Administration claiming that French companies are dumping hot-rolled steel in the U.S. market. You are in charge of the ITA's investigation. After reviewing the French producers’ financial books you have the following information about their production activities.

• Total production is 5 million units, 2 million are sold in the United States, while 3 million are sold in Latin America.

• The price of French hot-rolled steel sold in the U.S. is $140 per unit, while the price of U.S. produced hot-rolled steel is $180.

• The total production costs in the French hot-rolled steel industry (in millions of Euros) are as follows:

	Cost
Labor	280
Raw materials	155
Rent	20
Utilities	210
Research and Development	40
Miscellaneous variable costs	45

• The "relevant" exchange rate is €1 = $0.90

a) Are the French producers dumping hot-rolled steel in the U.S. market? If your answer is yes, how much should the anti-dumping duty imposed on these products be?

b) If your answer to part a) is yes, which other procedure would need to be followed before the anti-dumping duties are imposed permanently?