Econ 341

In-class Practice Exam

Four questions below are taken from the 2017 final exam

Question 2 (10 marks)

Given that New Zealand is a small country, answer the following questions using the information provided

a.   Calculate consumer and producer surplus in New Zealand under autarky.   (2 marks)

b.  Now, suppose that New Zealand starts trading and faces a world price of 6 NZD. Calculate consumer and producer surplus in New Zealand under free trade.   (2 marks)

c.   Does New Zealand benefit from trade?  Explain using your answers to parts a. and b. above.                              (2 marks)

d.   Concerned about the welfare of New Zealand producers, the government imposes a tariff of NZD 2 on imports. What is the amount of imports under the tariff? (2 marks)

e.   Calculate the net effect on New Zealand welfare of the tariff relative to free trade. (2 marks)

Question 3 (10 marks)

a.   Belgium is relatively well-endowed with skilled workers compared to China, which is relatively well-endowed with unskilled workers. Assume that the production of pharmaceutical products intensively uses skilled workers while the production of toys intensively uses unskilled workers.

i.   Which country has the higher relative price of pharmaceutical products prior to trading? Explain.     (2 marks)

ii.   Which country would you expect to have a higher relative wage in

skilled labour with no trade? Explain.          (2 marks)

iii.   Under free trade, which country experiences an increase in the relative wage of skilled workers? Explain.        (2 marks)

b.   What does the Stolper-Samuelson theorem predict about the impact of

international trade on inequality (as measured by the wage of high-skilled  workers relative to low-skilled workers) in developing countries? Explain.   (2 marks)

c.   Does evidence support the prediction in b. above?  If not, can you suggest one model we learnt in this course that can help explain the evidence?   (2 marks)

Question 4                                                                                                                                (20 marks)

Answer the following questions.

a.   When is infant industry protection a valid reason to impose a tariff on imports?    (4 marks)

b.   Suppose that there are two countries in the world, the US and China.  Assume that

China is currently in autarky (no trade).  Computer production in China is associated with a negative production externality because it pollutes the environment in China.

Suppose that China now starts trading with the US. Assuming that the US has a comparative advantage in computer production relative to China, answer the following questions:

i.      Relative to a case where there are no production externalities, are the

gains from trade for China in this case larger or smaller?  Why?   (2 marks)

ii.      Relative to a case where there are no production externalities, are the gains from trade for the US in this case larger or smaller? Why?   (2 marks)

c.   Provide any one argument in favour of regional trade agreements and explain your answer.                       (4 marks)

d.   You are given the following information on the labour required to perform. tasks in India and New Zealand:

The wage of a high-skilled worker in NZ is $25 and the wage of a low-skilled worker in NZ is $10 an hour. For India, the corresponding wage rates are $5 and $1 an hour.

i.          If the trade cost between India and NZ is 50%, which activities are performed in  NZ and which activities are performed in India?                   (2 marks)

ii.         Suppose that the trade cost falls to 30%, which activities are performed in NZ and which activities are performed in India?        (2 marks)

iii.       Which of the following statements are true after the fall in the trade cost from 50 to 30%?                             (4 marks)

A.  The absolute demand for high-skilled labour in NZ falls.

B.  The relative demand for high-skilled labour in NZ rises.

C.  The absolute demand for high-skilled labour in India rises, but by less than the rise in the absolute demand for low-skilled labour.

D.  The relative wage of high-skilled workers in NZ rises.

Question 5 (10 marks)

Assume that Toshiba and HP are the only two companies in the world that can make Tablet

PCs. Assume that Toshiba has a cost advantage over HP.  If both Toshiba and HP produce

Tablet PCs, Toshiba will make a loss of $3 million while HP will make a loss of $5 million. If

Toshiba is the only producer and seller of PCs in the world, it will make a profit of $60

million. If HP is the only producer and seller of PCs in the world, it will make a profit of $50 million.

a.   Draw a payoff matrix for this game and determine theNash Equilibria.        (2 marks)

b.  Now assume that currently, Toshiba is producing and selling Tablet PCs and HP is not. The US government is considering giving a subsidy of $25 million to HP to induce HP to produce in the world Table PC market.  How does this change the payoff matrix. Draw a new pay off matrix. What is the new Nash Equilibrium? Has the subsidy resulted in HP producing PCs?  What happens to Toshiba under this subsidy?                        (2 marks)

c.   Assuming that the US government only cares about its own revenue and the producer

HP, is the subsidy justified?  (In other words, will the subsidy result in a net gain?)   (2 marks)

d.   Can a subsidy of less than $25 million work to induce HP to produce?  If no, why

not? If yes, what is the minimum subsidy that will work?                            (2 marks)

e.   Now assume that the US government is not only worried about HP, which is a PC

producer, but also about US consumers.  When Toshiba was making and selling

Tablet PCs, consumer’s surplus in the US was $100 million.  However, now that only HP is producing and selling PCs, consumer’s surplus in the US has dropped to $55 million. This is because HP produces PCs at a higher cost than Toshiba and hence sells them at a higher price.

In this case, should the US government give a subsidy to HP?  Why?  Or why not?   (2 marks)

Additional Practice Question 6

Global shipping costs shot up in 2021, see diagram below:

Trace the short and long term effects of this phenomenon on the NZ economy.  Focus on the impacts on consumers, producers and on trade patterns.  Refer to the appropriate models to support your arguments.    (5 marks)