1. Suppose that the equations for the demand and supply curves in autarky for a particular good in the US are:
QS = 2P
QD = 400 – 2P
Solve for the equilibrium price and quantity and calculate the consumer, producer and total surpluses.
2. (Use the information from Q1) Suppose now that the US moves from autarky to free trade in this market and the world price for this good is $90:
a) Solve for the new equilibrium. Specifically, what is the quantity bought by the domestic consumers and the quantity sold by the domestic producers? Is the US importing or exporting this good and how many units?
b) Calculate the changes in consumer surplus, producer surplus and total surplus in this market due to free trade.
3. Refer to the following table, which describes the productivity per worker.
a. What is the opportunity cost of 1 unit of telephones in terms of radios in Taiwan? In Vietnam?
Determine whether each of the following statements is true or false. Provide a brief explanation of why it is true or false.
b. Taiwan has an absolute advantage in the production of both telephones and radios.
c. Vietnam has a comparative advantage in the production of telephones.
d. If the total labor supply in Taiwan is 4 and the total labor supply in Vietnam is 8, then one possible production combination for Vietnam is 40 units of telephone and 80 units of radio per hour.
e. If the two countries engage in international trade, what will Taiwan produce and how many?
f. What is the real wage in Taiwan in terms of radio? What is the real wage in Vietnam in terms of telephone?
g. Will Taiwan and Vietnam trade if the international relative price of telephone is 3? Briefly explain why or why not.
4. Refer to the following table.
a. Determine the pre-trade relative price of tequila in Mexico and the United States.
b. Given your answer in part (a), which country has a comparative advantage in the production of rice?
c. What is the lowest international relative price of tequila Mexico is willing to accept to engage in trade with the United States? Briefly explain why.
5. Consider two countries, Vietnam and China, producing two goods, textile and televisions. Suppose that textile is relatively labor-intensive. Vietnam has 20 units of capital and 16 units of labor and China has 300 units of capital and 150 units of labor.
a. Which country is relatively capital-abundant? Explain.
b. Which country will export textile? Explain.
c. In Vietnam, the production of which good decreases under trade? In China?
d. In China, is the relative price of televisions higher under free trade or no trade? Explain.
e. Which group benefits from trade in China? In Vietnam?
6. Suppose two countries, France and Germany, use only capital and labor for production. France has 2,050 units of capital and 916 units of labor, and Germany has 816 units of capital and 270 units of labor. Both countries produce two goods, cars and wine. In Germany, there are 366 units of capital and 135 units of labor employed in the wine industry. In France, there are 926 units of capital and 618 units of labor employed in the wine industry.
a. Which country is labor-abundant? Which country is capital-abundant?
b. Which industry is labor-intensive in Germany? Which industry is capital intensive in Germany?
c. Suppose that France and Germany do not engage in international trade. Assuming the countries have identical preferences, which country would have the cheaper relative price of wine?
d. Now suppose the two countries trade with one another. What will happen to the relative price of wine in France? In Germany?
e. What is the effect of free trade on labor in France? On capital owners in France?
f. What are the effects of free trade on wage and rental on capital in Germany?
g. With the opening of trade, what is most likely to occur in terms of the production of cars in France? In Germany?
7. You know the following information about labor productivity (units of output per hour of labor) in a country:
A worker can produce 8 units of product V in one hour.
A worker can produce 4 units of product Z in one hour.
a) With no international trade, what is the opportunity cost of product Z for this country?
b) The country now opens to free trade, and the equilibrium world price of product Z is 1.5 V/Z. In comparison with no trade, which product will the country shift toward producing more of?
c) For free trade with an equilibrium world price of product Z equal to 1.5 V/Z, is it possible that the labor productivities in the other country (the one that this country trades with) are 6 units of product V per labor hour and 6 units of product Z per labor hour? Why or why not?
8. The country of Puglia produces and consumes two products, pasta (P) and togas (T ), with increasing marginal opportunity costs of producing more of either product. With no international trade the relative price of pasta is 4 T/P.
a) Show Puglia’s economy, using a graph with a production-possibility curve and community indifference curves (represent Pasta in the x-axis and Togas in the y-axis).
b) Puglia now opens to international trade. With free trade the world relative price of pasta is 3 T/P. Which product will Puglia export? Which product will it import? On the same graph that you used for part a, show the free-trade equilibrium for Puglia.
c) Use your graph to explain whether or not Puglia gains from free trade.
9. A monopolistically competitive industry exists in both Pugelovia and the rest of the world, but there has been no trade in this type of product. Trade in this type of product is now opened.
a) Explain how opening trade affects domestic consumers of this type of product in Pugelovia.
b) Explain how opening trade affects domestic producers of this type of product in Pugelovia.


(Figure: Costs and Demand for a Monopolistic Competitor)

a) The profit-maximizing amount of output produced will be:
b) What price should the firm charge?
c) The total cost of producing the profit-maximizing output is:
d) The profits for the firm are:

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