Question Homework 4 Name Purdue ID Part 1. Questions that you do not need to turn in.

04 Jun Question Homework 4 Name Purdue ID Part 1. Questions that you do not need to turn in.

Question
Homework 4

Name

Purdue ID

Part 1. Questions that you do not need to turn in.

Answer the following questions. You do not need to turn them in.

Study Guide,

Chapter 8, problems 1b, 1c, 4a, 4c, 5a, 5b, 5c, 6, 7a, 7b, 9a, 11.

Part 2. Questions that you need to turn in. Be sure to show your steps so that we can give partial credits.

(56 points total)

1. Suppose there are two countries in a galaxy far, far away, the Empire and the Rebel Alliance. Both countries produce one final good (which cannot be traded) by undertaking many activities (which can be traded, or offshored, with a cost that is the same for all activities). Each activity requires both skilled and unskilled labor. The Empire has higher wages for both skilled and unskilled labor than the Rebel Alliance. Skilled labor earns 100% more than unskilled labor in the Empire. Skilled labor earns 50% more than unskilled labor in the Rebel Alliance.

For each statement below, determine if it is true or false. Then briefly explain why.(2 points each, 12 points total).

(1). No company in the Rebel Alliance will offshore any activity to the Empire.

(2). If R&D is more skilled-labor intensive than component-manufacturing, then R&D is less likely to be offshored to the Rebel Alliance by companies in the Empire.

(3). If the skilled labor in the Empire earn 10 times as much as those in the Rebel Alliance, then the unskilled labor in the Empire earn more than 10 times as much as those in the Rebel Alliance.

For questions (4)-(6), suppose that the war between the two countries intensifies and this significantly increases offshoring cost.

(4) Less activities are offshored to the Rebel Alliance.

(5). In the Empire, the wage of skilled labor is now less than 2 times the wage of unskilled labor.

(6). In the Rebel Alliance, the wage of skilled labor is more than 1.5 times the wage of unskilled labor.

2. The U.S. imports textile and apparel, and is considering a 20% tariff on textile and apparel. Assume that the U.S. is a small country. (2 points each, 8 points total)

(1) Draw a picture to illustrate the welfare loss for the U.S. from the tariff.

(2) Suppose that the elasticity of import demand for textile and apparel is -0.6. What is the percentage reduction in import quantity following the tariff? (Hint: what is the definition of the elasticity of demand?)

(3) Calculate the ratio of deadweight loss to the value of imports under free trade.

(4) Suppose that the import value of textile and apparel is $20 billion. What is the deadweight loss of the tariff?

3. Consider the following picture for the domestic market of soybeans of the U.S.For each statement below, determine whether it is true or false. Then briefly explain why. (2 points each, 20 points total).

d e f g h

b c

a

(1). When there is no trade, the U.S. producers make 350 tons of soybeans.

For questions (2)-(4), assume that the U.S. is a small country engaged in free trade for soy beans. The world market price is $6/unit.

(2). The U.S. imports 300 tons of soybeans under free trade.

(3). In going from no-trade to free trade, the producer surplus of the U.S. decreases by a + d.

(4). In going from no-trade to free trade, the U.S. consumers increase their purchase by 200 tons.

For questions (5)-(10), suppose the U.S. arranges a VER of 200 tons of soy beans. The U.S. is a small country.

(5). Under the VER, the domestic market price is $9.

(6). The exporting country collects $600 of rents from the VER

(7). Going from free-trade to VER, the consumer surplus of the U.S. decreases by b + c.

(8). Going from free-trade to VER, the U.S. suffers a total welfare loss of e+h+f+g.

(9). Going from free-trade to VER, the U.S. suffers the consumption loss of h.

(10). Going from free-trade to VER, the U.S. suffers the production loss of 150.

4. Consider the following picture for the import market of the Home country. The Home country has put in a tariff of $2/unit, and as a result, the price domestic consumers pay in the Home country rises to $11/unit.

Determine whether each of the following statements is true or false. Then briefly explain why. (2 points each. 16 points total).

(1). Under the tariff, the Home country imports 100 units.

(2). Under the tariff, the producers in the Home country receive $11/unit.

(3). Under the tariff, the Foreign producers collect a total revenue of 450 (net of the tariff).

(4). Under the tariff, the Home country collects the tariff revenue of a + c.

(5). The tariff decreases the national welfare of the Foreign country by c + d, as compared with free trade.

(6). The tariff decreases the national welfare of the Home country by a + b, as compared with free trade.

(7). The tariff increases the national welfare of the Home country by 25, as compared with free trade.

(8). The tariff decreases the world welfare by e + f, as compared with free trade.