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For each of the statements below, say whether it is clearly true, clearly false, or uncertain (true in some circumstances not specified in the statement and false in others), and justify your answer in two or three sentences. (a) If all consumers have the same preferences (same utility function), and there are aggregate gains from trade for the country, then all consumers gain from trade. (b) "Each nation is like a big corporation competing in the global marketplace." -(c) Increasing returns to scale will lead to monopolies in world trade and therefore consumers will lose from trade. (d) A tariff and a quota that generate the same volume of imports will have identical effects on prices and welfare. (e) Over the last 50 years, countries that maintained an overvalued real exchange rate have grown faster than those that adopted the opposite strategy, because an overvalued real exchange rate favored their domestic producers.

(a) "If there were free migration and truly open borders, workers from the lower-wage countries would stream into the higher-wage countries. These new arrivals would compete for jobs, accept work for lower pay, and force the existing jobholders to accept either lower wages or unemployment. Precisely for this reason, no one accepts or supports the notion of free immigration. "We do, however, accept and support the notion of free trade, which has the same effect. Instead of exporting workers to the United States, lower-wage countries simply import our jobs and industries to their workers. As the higher-wage nation suffers cutbacks in production, failures of companies, and losses of jobs, the market dictates that workers accept lower wages and a reduced standard of living to match the lower-wage foreign competition.

Explain the economic reasoning in this argument and assess its validity.

(b) "Consider two countries producing the same good with the same constant returns to scale production function, relating output to homogeneous capital and labor inputs. ... the Law of Diminishing Returns implies that the marginal product of capital is higher in the less productive (i.e., in the poorer) economy. If so, then if trade in capital good is free and competitive, new investment will occur only in the poorer economy, and this will continue to be true until capital-labor ratios, and hence wages and capital returns, are equalized." Within the set-up of Lucas' statement - output produced by capital and labor with constant returns to scale and the same technology being accessible to all countries - how can our models of international trade explain why capital flows do not occur the way Lucas argues they should?

Assume that all Netbooks are identical goods, and that the market is competitive. The demand for Netbooks from users in the US is given by the demand curve Q = 9 - P , and the supply of Netbooks from US manufacturers is given by the supply curve Q = P - 2 , where the price P is measured in hundreds of dollars and the quantities Q are measured in millions. The market for Netbooks in the US is large enough to influence the world price. The export supply curve of foreign manufacturers selling in the US market is given by Q = 2 P - 1. 2

(a) Suppose the Indian government levies an export tax TS on each unit quantity of software. (i) (1 point) Write down expressions for the profits of Programagica and Denovo as functions of the prices and the tax rate. (ii) (4 points) Calculate the best response functions giving each manufacturer's profitmaximizing price as a function of the other's price and the tax rate. (iii) (2 points) Solve these functions to express the Bertrand-Nash equilibrium prices as functions of the tax rate. (iv) (3 points) Find the resulting expressions for the quantities and the profits of each firm, also as functions of the tax rate. (b) The Indian government wants to maximize