INTERNATIONAL TRADE
- Other / Other
- 16 Mar 2021
- Price: $24
- Accounting & Economics Assignment Help / Managerial Economics
INTERNATIONAL TRADE
For each
question below, please show all working. Marks will be deducted for incomplete
working. Where relevant, calculate solutions to 2 decimal places.
1. The United States (US) and China export
cars to, and import cars from, each other. Which of the international trade
models discussed in class can be used to at least partly explain this trade
pattern? In each case, explain carefully how.
2. New
Zealandβs trade deficit with the rest of the world is large. Should the New
Zealand (NZ) Government implement restrictive trade policies to help the NZ
economy? Explain carefully, referring to what you have learned in this unit.
3. US
Milk Co. and EU Milk Co. are milk producers. US Milk Co. produces in the United
States while EU Milk Co. produces in Europe. Both firms sell very similar
products (milk) to consumers around the world.
Say
that the demand curve for a tank (i.e. 50 litres) of milk is given by:
ππ = 700 β 2ππ
where Q ο½ qA ο« qB is the total number of 50-litre tanks
of milk produced by US Milk Co. and EU Milk Co.; p is the price of each
50-litre of milk measured in $. Assume that the marginal cost of producing each
tank of milk is $10 for US Milk Co. and $5 for EU Milk Co.
The
US is thinking of subsidising US Milk Co.βs production so that it can better
compete with its European rival.
i. Initially
neither firm receives a subsidy. If both firms seek to maximise profit, how
many 50-litre tanks of milk will each produce and what will their profits be?
Illustrate the solution on a diagram.
ii. The
US Government pays US Milk Co. a subsidy of $5 for each 50-litre tank of milk
it produces. Assume that the European Union does not retaliate. How many
50-litre
tanks of milk will each firm produce now and what will their profits be? Draw
the new solution on the same diagram.
i. Which
firm gains and which firm loses from the subsidy? With the aid of diagrams,
explain why.
ii. Calculate
the optimal subsidy that the US Government could provide to US Milk Co. That
is, assuming Europe does not retaliate, calculate the subsidy that will
maximise US Milk Co.βs profit.
2.
Assume
a monopolistically competitive car industry. The demand facing any firm i is
given by:
1
ππ_{ππ} = ππ οΏ½οΏ½πποΏ½ β οΏ½
1
οΏ½ (ππ_{ππ} β ππΜ
)οΏ½
50,000
where qi is firm iβs sales, Q signifies total
industry sales (i.e. the size of the
market),
N is the number of firms in the industry,
pi is the price
charged by
firm i itself and p is the
average price charged by firm i's competitors.
Assume
that the production function for cars is such that: (i) 10,000,000 hours of
labour are required even if no cars are produced and (ii) 500 hours of labour
are required to produce each additional car. The wage rate is $50/hour.
Now,
suppose that there are two countries: Home and Foreign. Home has annual sales
of 1,000,000 cars and Foreign has annual sales of 2,000,000. Both firms face
the same production function.
i. Assuming a symmetric autarky equilibrium, use the zero profit condition to derive the equation for the price of cars in Home as a function of N. Do the same for Foreign.
ii. Assuming a
symmetric autarky equilibrium, use the profit maximising profit condition to
derive the equation for the price of cars in Home as a function of N. Do the
same for Foreign.
iii.
Using
your answers from (i) and (ii), solve for the autarky equilibrium number of
firms, the price of cars and the output of each firm in Home and Foreign. (solve
to 2 decimal places if required)
iv.
(4
marks) Assume
no transportation cost and that Home and Foreign freely trade cars with one
another. For this integrated market, solve for the equilibrium price, the
number of firms in Home and Foreign, and the output per firm. (solve to 2
decimal places if required).
v. Explain how and
why the integrated equilibrium calculated in part (iv) differs to the autarky
equilibria calculated in part (iii).