ECN160A International Microeconomics

Winter 2007

Final Exam

EXAM FORM A

I.Multiple Choice (3pts each)

1.Countries trade with each other because they are _______ and because of ______.

(a)different, costs

(b)similar, scale economies

(c)different, scale economies

(d)similar, costs

(e)None of the above.

2.The Ricardian theory of comparative advantage states that a country has a comparative advantage

in widgets if

(a)output per worker of widgets is higher in that country.

(b)that country's exchange rate is low.

(c)wage rates in that country are high.

(d)the output per worker of widgets as compared to the output of some other product is higher in that country.

(e)Both (b) and (c).

3.In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would

(a)move the point of production along the production possibility curve.

(b)shift the production possibility curve outward, and increase the production of both goods.

(c)shift the production possibility curve outward and decrease the production of the labor-intensive product.

(d)shift the production possibility curve outward and decrease the production of the capital-intensive product.

(e)None of the above.

4.The Case of the Missing Trade refers to

(a)the finding that U.S. exports were more labor intensive than its imports.

(b)the fact that world exports do not equal world imports.

(c)the fact that there is less trade than predicted by the Heckscher-Ohlin theory.

(d)the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists.

(e)None of the above.

5.A country will be able to consume a bundle which is not attainable solely from domestic production only if

(a)the world terms of trade differ from its domestic relative costs.

(b)the country specializes in one product.

(c)the country avoids international trade.

(d)the world terms of trade equal the domestic relative costs.

(e)None of the above.

6.If the U.S. has a higher marginal propensity to consume (MPC) imports as compared to both its MPC for exportables and nontradables, then sending $100m in aid to earthquake victims in Pakistan will

(a)worsen the U.S. terms of trade.

(b)improve the U.S. terms of trade.

(c)leave the world terms of trade unaffected.

(d)worsen the terms of trade of both donor and recipient countries.

(e)None of the above.

7.The simultaneous export and import of different types of cars by South Korea is an example of

(a)reciprocal dumping.

(b)imperfect competition.

(c)intra-industry trade.

(d)inter-industry trade.

(e)None of the above.

8.International trade based on scale economies is likely to be associated with

(a)Ricardian comparative advantage.

(b)comparative advantage associated with Heckscher-Ohlin factor-proportions.

(c)comparative advantage based on quality and service.

(d)comparative advantage based on diminishing returns.

(e)None of the above.

9.The difficulty of ascertaining the right second-best trade policy to follow

(a)provides support for the third-best policy approach.

(b)provides support for increasing research capabilities of government agencies.

(c)provides support for abandoning trade policy as an option.

(d)provides support for free trade.

(e)None of the above.

10.The simple model of competition among political parties assuming no campaign contributions or lobbying predicts that governments would always end up choosing

(a)the optimal tariff.

(b)an excessively high tariff.

(c)the zero tariff (free-trade).

(d)the tariff rate favored by the median voter.

(e)None of the above.

11.The high correlation between rapid growth in exports and rapid economic growth observed in several East Asian countries in recent decades proves that

(a)Export promoting trade policy leads to relatively rapid economic growth.

(b)A free-trade orientation of trade policy results in rapid economic growth.

(c)Exports help growth, whereas imports impede growth.

(d)Trade policy is perhaps the most important policy area for promotion of economic development.

(e)None of the above.

12.Import substitution policies make use of

(a)Tariffs that discourage goods from entering a country.

(b)Quotas applied to goods that are shipped abroad.

(c)Production subsidies granted to industries with comparative advantage.

(d)Tax breaks granted to industries with comparative advantage.

(e)None of the above.

13.Export-led growth can promote increased efficiency by

(a)Discouraging competition in the global economy.

(b)Exploiting lower environmental regulation.

(c)Leading to unemployment among domestic workers.

(d)Allowing firms benefit from economies of large-scale production.

(e)None of the above.

14.For most developing countries

(a)Productivity is high among domestic workers.

(b)Population growth and illiteracy rates are low

(c)Saving and investment levels are high

(d)Agricultural goods and raw materials constitute a high proportion of domestic output.

(e)None of the above.

15.The imperfect capital market justification for infant industry promotion

(a)Assumes that long-term financing for firms in new industries is not available.

(b)Assumes that infant industries will soon mature.

(c)Assumes that infant industries will be in products of comparative advantage.

(d)Assumes that banks can allocate resources efficiently.

(e)None of the above.

II.Analytical Problems

1.(15pts total)There are two identical countries, Alpha and Beta, with the following labor supply and input requirements to produce identical tables and chairs:

Available labor:100 units

Tables:2 units per table

Chairs:1 unit per chair

(i)(5pts) Draw the world relative supply curve, using the relative price of tables (Pt/Pc) and relative quantity of tables (Qt/Qc).

(ii)(5pts)Suppose that Alpha experiences a huge growth in its chair production technology, so that it requires only one-half of a labor unit to produce one chair.Draw the new world relative supply curve, using the relative price of tables (Pt/Pc) and relative quantity of tables (Qt/Qc).

(iii) (5pts)Suppose that world relative demand is given by Pt/Pc = Qc/Qt.What will be the exact world relative price for tables, Pt/Pc?Can either Alpha or Beta or both countries gain from trade at this price?Why or why not?

2.(10pts total) Suppose that the fixed startup costs (to build the factory and buy equipment) for a firm producing MP3 players, a differentiated good, is $250,000.Variable costs (labor and materials) are $10 per MP3 player produced.The market price in dollars is given by

P = 10 + (1),

where n equals the number of firms serving the market.Assume that each firm serves an equal fraction of the market.

i)(5pts)Suppose that the country Gamma has a population of 10,000 people.Find the number of firms producing MP3 players under autarky and the equilibrium price.

(ii)(5pts)Suppose that Gamma forms a free trade area with Delta and that Delta has a population of 750,000.Find the number of firms serving the combined market and the new equilibrium price.

ECNlA International Microeconomics Winter 2007 Final Exam EXAM FORM A 1. Multiple Choice (3pts each) 1. Countries trade with each other because they are and because of (a) different, costs (b) similar, scale economies (c) different, scale economies (d) similar, costs (e) None of the above. 2. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if (a) output per worker of widgets is higher in that country. (b) that country's exchange rate is low. (c) wage rate5 in that country are high. (d) the output per worker of widgets as compared to the output of some other product is higher in that country. (e) Both (b) and (c). 3. In the 2-factor, 2 good HeckscherOhlin model, an inux of workers from across the border would (a) move the point of production along the production possibility curve. (b) shift the production possibility curve outward, and increase the production of both goods. (c) shift the production possibility curve outward and decrease the production of the labor- intensive product. (d) shift the production possibility curve outward and decrease the production of the capital- intensive product. (e) None of the above. 4. The Case of the Missing Trade refers to (a) the finding that US. exports were more labor intensive than its imports. (b) the fact that world exports do not equal world imports. (c) the fact that there is less trade than predicted by the HeckSCher-Ohlin theory. (d) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists. (e) None of the above. 5. A country will be able to consume a bundle which is not attainable solely from domestic production only if (a) the world terms of trade differ from its domestic relative costs. (b) the country specializes in one product. (c) the country avoids international trade. (d) the world terms of trade equal the domestic relative costs. (e) None of the above. 6. If the US. has a higher marginal propensity to consume (MPC) imports as compared to both its MPC for exportables and nontradables, then sending $100m in aid to earthquake victims in Pakistan will (a) worsen the U.S. terms of trade. (b) improve the US. terms of trade. (c) leave the world terms of trade unaffected. (d) worsen the terms of trade of both donor and recipient countries. (e) None of the above. 7. The simultaneous export and import of different types of cars by South Korea is an example of (a) reciprocal dumping. (b) imperfect competition. (c) intra-industry trade. (d) inter-industry trade. (e) None of the above. 8. International trade based on scale economies is likely to be associated with (a) Ricardian comparative advantage. (b) comparative advantage associated with HeckscherOhlin factor-proportions. (c) comparative advantage based on quality and service. (d) comparative advantage based on diminishing returns. (e) None of the above. 9. The difficulty of ascertaining the right second-best trade policy to follow (a) provides support for the third-best policy approach. (b) provides support for increasing research capabilities of government agencies. (c) provides support for abandoning trade policy as an option. (d) provides support for free trade. (e) None of the above. 10. The simple model of competition among political parties assuming no campaign contributions or lobbying predicts that governments would always end up choosing (a) the optimal tariff. (b) an excessively high tariff. (c) the zero tariff (free-trade). (d) the tariff rate favored by the median voter. (e) None of the above. 11. The high correlation between rapid growth in exports and rapid economic growth observed in several East Asian countries in recent decades proves that (a) Export promoting trade policy leads to relatively rapid economic growth. (b) A free-trade orientation of trade policy results in rapid economic growth. (c) Exports help growth, whereas imports impede growth. (d) Trade policy is perhaps the most important policy area for promotion of economic development. (e) None of the above. 12. Import substitution policies make use of (a) Tariffs that discourage goods from entering a country. (b) Quotas applied to goods that are shipped abroad. (c) Production subsidies granted to industries with comparative advantage. (d) Tax breaks granted to industries with comparative advantage. (e) None of the above. 13. Export-led growth can promote increased efficiency by (a) Discouraging competition in the global economy. (b) Exploiting lower environmental regulation. (c) Leading to unemployment among domestic workers. (d) Allowing firms benet from economies of large-scale production. (e) None of the above. 14. For most developing countries (a) Productivity is high among domestic workers. (b) Population growth and illiteracy rates are low (c) Saving and investment levels are high (d) Agricultural goods and raw materials constitute a high proportion of domestic output. (e) None of the above. 15. The imperfect capital market justification for infant industry promotion (a) Assumes that long-term financing for firms in new industries is not available. (b) Assumes that infant industries will soon mature. (c) Assumes that infant industries will be in products of comparative advantage. (d) Assumes that banks can allocate resources efficiently. (e) None of the above. 11. Analytical Problem 1. (lSpts total) There are two identical countries, Alpha and Beta, with the following labor supply and input requirements to produce identical tables and chairs: Available labor. 100 units Tables: 2 units per table Chairs: 1 unit per chair (i) (Spts) Draw the world relative supply curve, using the relative price of tables (Pt/Pc) and relative quantity of tables (Qt/QC). (ii) (Spts) Suppose that Alpha experiences a huge growth in its chair production technology, so that it requires only one-half of a labor unit to produce one chair. Draw the new world relative supply curve, using the relative price of tables (PU'Pc) and relative quantity of tables (QtI'Qc). (iii) (Spts) Suppose that world relative demand is given by PUPc = 06th. What will be the exact world relative price for tables, PUPc? Can either Alpha or Beta or both countries gain 'om trade at this price? Why or why not? 2. (1 Opts total) Suppose that the xed startup costs (to build the factory and buy equipment) for a rm producing MP3 players, a differentiated good, is $250,000. Variable costs (labor and materials) are $10 per MP3 player produced. The market price in dollars is given by P = 10 + (U11), where n equals the number of rms serving the market. Assume that each rm serves an equal fraction of the market. i) (Spts) Suppose that the country Gamma has a population of 10,000 people. Find the number of rms producing MP3 players under autarky and the equilibrium price. (ii) (Spts) Suppose that Gamma forms a free trade area with Delta and that Delta has a population of 750,000. Find the number of rms serving the combined market and the new equilibrium price