International Economics Midterm Exam - Version A by Professor Brian Fikkert, Exams of International Economic Relations

Download International Economics Midterm Exam - Version A by Professor Brian Fikkert and more Exams International Economic Relations in PDF only on Docsity! International Economics Professor Brian Fikkert Economics 440 November 12, 1995 Second Midterm Exam: Version A YOUR NAME: _______________________________ Dear Class: I am currently lying in my bed in a hotel in India, trying to recover from jet lag. There is no safer place to be on the day of an exam than the other side of the world. I will return in time for class next week. You will have a substitute teacher on Thursday. As usual, I do not believe this exam is too difficult. Try to relax, and I think you will do just fine. I hope you all do well! I. Multiple Choice: Choose the ONE letter which corresponds to the correct answer and fill in your answer on SCANNING SHEET NUMBER 1 (3 points each). 1. If there are increasing returns to scale in the production of goods, then: a. Countries may benefit from trade even if they are identical. b. It is always possible to determine the pattern of trade, c. After trade begins, each good will be produced at lower average cost than before trade began, a and c a and b 2. You own a firm which produces shoes with a production function which exhibits internal increasing returns to scale. Initially, you. employ 10 workers and 10 units of capital, and you produce 7 pairs of shoes. If you increased the labor employed to 20 and the capital employed to 20, then which of the following is possible: a. The total output of shoes will now be 10 The total output of shoes will now be 12 The total output of shoes will now be 14 The total output of shoes will now be 18 a and b 3. There are two goods: cars and food. Cars cire produced with a production function which exhibits internal increasing returns to scale and which is capital-intensive. Food is produced with a constant returns to scale production function and is labor- intensive. The home country is capital-abundant and the foreign country is labor-abundant. Which of the following is true in the free trade equilibrium: a. Home will export only cars. b. Foreign will export only food. c. Foreign will export some cars and some food. /rdN. a and b r eA a and c 4. When a small country imposes a tariff on its imports of widgets, then: f a). The quantity of widgets produced by the domestic producers ^-^ rises, b. The quantity of widgets purchased by the domestic consumers rises. c. The quantity of imports rises, d. a and b e. a and c 5. The world price of rice is $10 per bag. Sri Lanka, a small country, imposes a 30% tariff on its imports of rice,. After the tariff is imposed, Sri Lanka imports 1000 bags of rice per year. Then which of the following is true: a. Sri Lankan rice producers will receive a price of $13 when they sell rice in the domestic market, b. Sri Lankan rice producers will receive a price of $10 when they sell rice in the domestic market, c. Sri Lankan consumers will pay a price of $10 if they buy domestic rice and $13 if they buy foreign rice, d. The government of Sri Lanka will collect $3000 in tariff revenue. a and d 6. In the previous question, assume instead that the government of Sri Lanka imposes a quota of 1000 bags on imports of rice. The quota license is given to Ahmed, the nephew of Sri Lanka's prime minister. Then which of the following is true: a. Sri Lankan producers would prefer the quota over the tariff. b. Sri Lankan consumers would prefer the quota over the tariff. c. The foreign country would prefer the quota over the -\ tariff. ^ Ahmed prefers the quota over the tariff. e. c and d 7. Which of the following statements is true for a small country: a. Voluntary export restraints are worse than either tariffs or quotas in terms of their impacts on total domestic surplus. b. Quotas are worse than tariffs because the foreigners get the economic rents, c. If a bureeiucrat is dishonest, then he may be able to benefit financially from his power to grant quota licenses, d. a and b fe\ a and c YOU HAVE VERSION "A" OF THIS EXAM. PLEASE FILL IN THE LETTER "A" FOR QUESTION 16 ON YOUR FIRST SCANNING SHEET. II. True or False: 1 Point Each USE SCANNING SHEET NUMBER 2. A=TRUE. B=FALSE 1. ' A tariff will always reduce the welfare of the country which imposes it. Under GATT rules, it is legal to impose a tariff when domestic industry experiences "serious injury" from imports. 3. _____ The Multifibre Arrangement is an exception to GATT implemented at the request of less developed countries to give them special privileges in their exports of textiles . 4. ! A voluntary export restraint transfers economic rents to foreigners. 5. ' If there are increasing returns to scale and few firms in the market, then it is possible that "strategic intervention" by the government might raise domestic profits and welfare. 6. ' When the U.S. imports Volkswagen cars from Germany and exports Cadillac cars to Germany, this is an example of inter-industrv trade. 7. ' The U.S. is most likely to engage in intejr- industry trade with Europe and intra-industry trade with countries in Africa. 8. ____ It was permissible under GATT to impose trade protection to temporarily reduce a balance of payments crisis. 9. ^ It might be justifiable to provide a production subsidy to IBM, a major producer of computers in the U.S., because IBM's computers generate technology spillovers to the rest of the economy. /-~~ 10. _____ The Smoot-Hawley Act of 1930 is generally credited with ending the Great Depression. £• 11. ' The Generalized System of Preferences was that portion of GATT which enabled the U.S. to provide lower tariffs to its allies in World War II. 12 13 14 15 The Multifibre Agreement, which was established in 1974, was gradually phased out before the Uruguay Round even began. _ The World Trade Organization has substantially more powcsr to enforce trade laws than GATT did. If the U.S. removes its tariffs on steel imports, then U.S. steel workers will be better off in the short-run. The fact that other nations may retaliate reduces the attractiveness of using a tariff for a large country. YOU HAVE VERSION "A" OF THIS EXAM. PLEASE FILL IN THE LETTER "A" FOR QUESTION 16 ON YOUR SECOND SCANNING SHEET. III. Fill in the blanks in the test itself with the proper letters (2 points each") The United States, a large country, decides to impose a tariff of 20% on its imports of cars. Before imposing the tariff, the world price of cars is $11,000. After imposing the tariff, the world price of cars falls to $10,000. Consider the following diagram: When the U.S. Government imposes the tariff, then (if the change is negative, you must demonstrate this by the use of a "-" sign): 1. The change in consumer surplus is represented by the area(s) ~-(.£+c+o+£) 2. The change: in producer surplus is represented by the area(s) ____&________._ 3. The change in government revenue is represented by the area(s) T> *-W_________.. 4. The net change in welfare to the U.S. society as a whole is the area(s) // (^ * O_______.. 5. Assuming no retaliation by foreigners, does the tariff cause total surplus (or welfare) to rise or fall in the U.S.? Explain (2 points):