04 Jun Question International Trade and Investments – ECO339K University of Texas at Austin
Question
International Trade and Investments – ECO339K University of Texas at Austin
Assignment 5
Justify your answers.
First Name: 1 pt
Last Name: 2pts
Homework in one piece (single sheet or stapled): 2 pts
1. Protection of the domestic monopolist (35 points)
In a small country, there is a single firm producing good X. The local demand curve is given by
P = 100 – Q. The firm’s marginal cost curve is MC =2Q. The world price of good X is PW = 30.
a) (10 pts) In free trade, what will be the domestic production of good X, how many units will
be consumed and how many units will be imported?
b) (10 pts) Suppose the government introduces a tariff t = 10. Find new domestic production
and consumption of the good. How many units will the country import?
c) (5 pts) What would be a tariff-equivalent quantitative restriction?
d) (5 pts) If a tariff-equivalent quota was used, would the resulting domestic price be higher,
lower or the same as under the tariff? Why?
e) (5 pts) Will the monopolist profits be higher under a tariff or under a tariff-equivalent quota?
Explain. (You may, but you don’t have to calculate anything – verbal explanation is enough).
2. Export subsidy (60 points)
A large country has a domestic demand for sugar given by P = 100 – Q and domestic supply
given by P = Q. The world demand for the country’s exports is given by P = 50 – Q.
a) (5 pts) Find the equilibrium price and quantity in the domestic market when no trade is
allowed.
b) (10 pts) Derive the country’s export supply curve.
c) (10 pts) If there is free trade, how many units will the country export?
d) (15 pts) The government introduces a subsidy s = 10 per unit of sugar exported and at the
same time it doesn’t let any imports in. Calculate the new (i) domestic price, consumption
and production, (ii) world price and quantity exported by the country. What will be the cost
of such subsidy to the government?
e) (20 pts) Now suppose the government decides to subsidize the production of sugar
(regardless of who it is sold to). The government wants to achieve the same increase in
domestic production as in part d). What should be the amount of such production subsidy?
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