Problem Set # 2

This problem set is due Wednesday, November 8, 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. Assume that Taiwan's acrylic sweater production is in the hands of a single corporation, the Chungi Company. You are hired as a consultant by Ms. Iris Chungi, who is the President of this corporation. You are given the following information about the Demand and the Marginal Revenue schedules that this company faces on its sales in Taiwan and in the United States.

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

a) How much output should the Chungi Company produce?

b) How much output should the Chungi Company sell in Taiwan, and how much should it sell in the U.S.?

c) What should the prices of Chungi's Sweaters in Taiwan and in the U.S. be?

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

e) Ms. Chungi wants to know if by following your advice from the previous questions her 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 Chungi's Sweaters, how much should this dumping duty equal? Why?

2. Sweden's domestic demand and supply curves of cowboy hats are given by the following table:

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

b) Assume that Sweden is a small country, that the international price of cowboy hats is 250 K and that Sweden engages in free trade. What are the levels of domestic prices, production, consumption, and exports in Sweden?

c) The Prime Minister of Sweden, a big John Wayne fan, decides that she wants to promote exports of cowboy hats, and in order to do this she gives an export subsidy to domestic producers equal to 50 K for each cowboy hat exported. What are the effects of this policy on the domestic prices, production, consumption, and exports in Sweden? (Assume that Swedish consumers cannot buy any cowboy hats in the international market) Illustrate your answer with a diagram.

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

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

3. Concentrate on the market for Cranberries between Jodeci and Xscape. Assume that Cranberries are a homogeneous product produced under perfect competition and that there are only two countries in the world, Jodeci and Xscape.

a) Assume that Xscape has a comparative advantage in the production of cranberries. Show the free-trade equilibrium for cranberries 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 Jodeci's domestic production and consumption under free trade.

b) Because of strong lobbying efforts by cranberry producers, Dr. Devante, the President of Jodeci, agrees to protect his country's domestic production from foreign competition. In a meeting with his economic advisors President Devante learns that Jodeci's commitments to the WTO restrict his ability to impose tariffs or quotas on Xscape's imports. Dr. K. Ci, one of President Devante's advisors, suggests that a VER should be "negotiated" with Xscape to circumvent WTO negotiations and at the same time obtain the desired protection to the domestic producers. After intense negotiations the Xscapians agree to "voluntarily" restrict their exports to Jodeci to half of the free trade equilibrium level. Use your diagram from part a) to show the effects of this VER in Xcape's domestic price, domestic production, domestic consumption, and exports. Also show the effects of this change in Jodeci'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 Xscape and in Jodeci. Also show the net welfare effect of the VER on Xscape and Jodeci.

d) Which type of Jodecian protection does Xscape prefer, Tariff, Quota, or VER? Why? What about Jodeci?

4. South Korea's domestic demand and supply schedules for auto tires are the following:

a) Assume South Korea is a small country, that it has no barriers to trade, and that the world price of an auto tire is 14,000 Wons. Determine South Korea's free-trade price and volume of auto tire imports. Determine, also, South Korea's domestic production and consumption of auto tires. Illustrate your answers in a diagram.

b) In an effort to reduce the U.S. trade deficit, President Clinton goes to several Asian countries to try to "persuade" them to buy more U.S. products. During his stop in South Korea, he obtains a commitment from this country to increase their imports of U.S. made auto tires (assume that all auto tires South Korea imports are made in the U.S.). In order to achieve this "Voluntary Import Expansion", the government of South Korea offers a 8,000 Wons rebate to all consumers in this country that buy an imported auto tire. In other words, for each auto tire imported a consumer will receive an 8,000 Won check from South Korea's government. Determine the effects of this VIE on the domestic price, output, and consumption of auto tires as well as South Korea'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 South Korea better off or worse off as a result of the imposition of the VIE in the auto tire industry.