04 Jun Question 6. Table 8.8 depicts the supply and demand schedules of gloves for Portugal, a small nation that is unable to affect the world pric
Question
6. Table 8.8 depicts the supply and demand schedules of gloves for Portugal, a small nation that is unable to affect the world price. On graph paper, draw the supply and demand schedules of gloves for Portugal.
a. Assume that Germany and France can supply gloves to Portugal at a price of $2 and $3, respectively. With free trade, which nation exports gloves to Portugal? How many gloves does Portugal produce, consume, and import?
b. Suppose Portugal levies a 100 percent nondiscriminatory tariff on its glove imports. Which nation exports gloves to Portugal? How many gloves will Portugal produce, consume, and import?
c. Suppose Portugal forms a customs union with France. Determine the trade-creation effect and the trade-diversion effect of the customs union. What is the customs union’s overall effect on the welfare of Portugal?
d. Suppose instead that Portugal forms a customs union with Germany. Is this a trade?diverting or trade?creating customs union? By how much does the customs union increase or decrease the welfare of
Portugal?
CHAPTER 9
11. Table 9.8 illustrates the revenue conditions facing
ABC, Inc., and XYZ, Inc., which operate as competitors in the U.S. calculator market. Each firm realizes constant long?run costs (MC 5 AC) of $4 per unit. On graph paper, plot the enterprise demand, marginal revenue, and MC = AC schedules. On the basis of this information, answer the following questions.
a. With ABC and XYZ behaving as competitors, the equilibrium price is $ and output is . At the equilibrium price, U.S. households attain $ of consumer surplus, while company profits total $ .b. Suppose the two organizations jointly form a new one, JV, Inc., whose calculators replace the output sold by the parent companies in the U.S. market. Assuming that JV operates as a monopoly and that its costs
(MC = AC) equal $4 per unit, the company’s output would be at a price of $ , and total profit would be $ . Compared to the market equilibrium position achieved by ABC and XYZ as competitors, JV as a
monopoly leads to a deadweight loss of consumer surplus equal to $ .
c. Assume now that the formation of JV yields technological advances that result in a per?unit cost of only $2; sketch the new MC 5 AC schedule in the figure. Realizing that JV results in a deadweight loss of consumer surplus, as described in part b, the net effect of the formation of JV on U.S. welfare is a gain/loss of $ . If JV’s cost reduction was due to the wage concessions of JV’s U.S. employees, the net welfare gain/ loss for the United States would equal $ . If JV’s cost reductions resulted from changes in work rules leading to higher worker productivity, the net welfare gain/loss for the United States would equal $ .
12. Table 9.9 illustrates the hypothetical demand and supply schedules of labor in the United States. Assume that labor and capital are the only two factors of production. On graph paper, plot these schedules.
a. Without immigration, suppose the labor force in the United States is denoted by schedule S0. The equilibrium wage rate is $ ; payments to native U.S. workers total $ , while payments to U.S. capital
owners equal $ .
b. Suppose immigration from Hong Kong results in an overall increase in the U.S. labor force to S1. Wages would rise/fall to $ , payments to native U.S. workers would total $ , and payments to Hong Kong immigrants would total $ . U.S. owners of capital would receive payments of $ .
c. Which U.S. factor of production would gain from expanded immigration? Which U.S. factor of production would likely resist policies permitting Hong Kong workers to freely migrate to the United States.
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