Problem Set # 2

This problem set is due Thursday, March 25, 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 Costa Rica’s domestic demand and supply curves of surfboards:

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

b) Assume that Costa Rica is a small country, that the international price of surfboards is 18,000 colones and that Costa Rica engages in free trade. What are the levels of domestic prices, production, consumption, and exports in Costa Rica?

c) The President of Costa Rica, a big "Bay Watch" fan, decides that she wants to promote exports of surf boards, and in order to do this she gives an export subsidy to domestic producers equal to 6,000 colones for each surf board exported. What are the effects of this policy on the domestic prices, production, consumption, and exports in Costa Rica? (Assume that Costa Rica's consumers cannot buy any surf boards in the international market) Illustrate your answer with a diagram.

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

e) Show in your diagram the losses to Costa Rica'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 hot-rolled steel between the United States and Japan. Assume that hot-rolled steel is a homogeneous product produced under perfect competition and that there are only two countries in the world, the United States and Japan.

a) Assume that Japan has a comparative advantage in the production of hot-rolled steel. Show the free-trade equilibrium for hot-rolled steel 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 U.S.' domestic production and consumption under free trade.

b) Because of strong lobbying efforts by steel producers, William Clinton agrees to protect his country's domestic production from foreign competition. In a meeting with his economic advisors President Clinton learns that the U.S.' commitments to the WTO restrict his ability to impose tariffs or quotas on the Japanese imports. One of President Clinton's advisors suggests that a VER should be "negotiated" with Japan to circumvent WTO regulations and at the same time obtain the desired protection to the domestic producers. After intense negotiations the Japanese agree to "voluntarily" restrict their exports to the U.S. to half of the free trade equilibrium level. Use your diagram from part a) to show the effects of this VER on Japan’s domestic price, domestic production, domestic consumption, and exports. Also show the effects of this change on the U.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 Japan and the U.S. Also show the net welfare effect of the VER on Japan and the U.S.

d) Which type of U.S. protection does Japan prefer, Tariff, Quota, or VER? Why? What about the U.S.?

3. Belgium’s domestic demand and supply schedules for twin-engine jets are the following:

a) Assume Belgium is a small country, that it has no barriers to trade, and that the world price of a twin-engine jet is €3.5 million. Determine Belgium’s free-trade price and volume of twin-engine jet imports. Determine, also, Belgium’s domestic production and consumption of twin-engine jets. Illustrate your answers in a diagram.

b) In an effort to reduce the U.S. trade deficit, President Clinton goes to several European countries to try to "persuade" them to buy more U.S. products. During his stop in Belgium, he obtains a commitment from this country to increase their imports of U.S. made twin-engine jets (assume that all twin-engine jets that Belgium imports are made in the U.S.). In order to achieve this "Voluntary Import Expansion", the government of Belgium offers a €1.5 million rebate to anyone in this country that buys an imported twin-engine jet. In other words, for each twin-engine jet imported, the buyer will receive a €1.5 million check from Belgium’s government. Determine the effects of this VIE on the domestic price, output, and consumption of twin-engine jets as well as Belgium’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 Belgium better off or worse off as a result of the imposition of the VIE in the twin-engine jet industry.

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

Labor                     26,000
Parts:
    Chips                 13,000
    Displays             13,000
Rent                       26,000
Utilities                   13,000
Research and
Development         65,000
Other                     26,000

• The "relevant" exchange rate is $1 = 130 ¥

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

b) Which other procedure needs to be followed before the anti-dumping duties are imposed permanently?