Supply and Demand for Sweatshirts in Mexico and the US Are Shown Below

ECO 358Professor Malamud

International EconomicsJuly 23, 2004

Classroom Exam #1

You can rewrite one question at home after the exam is returned to you. If you choose to rewrite a question, you must rewrite ALL of the question, even parts that you got a perfect score on in class. If you rewrite Question 3, you must explain each answer, not just fill in the blanks with the right numbers. Rewrites are graded to a higher standard than answers written in class! The exact same answer may earn fewer points on the rewrite than on the exam taken in class. Your score for the exam is the average of your classroom score and your rewrite score. Rewrites are due on July 29. You must submit your classroom exam together with your rewrite so your scores can be averaged.

Question 1. (8 points each part).

1. The US can produce just about everything that Americans buy. Why then does the US government push free trade agreements like NAFTA and the Free Trade Area of the Americas?

1. In the United States, free trade tends to make the rich richer and the poor poorer. Explain why.

1. The US used to be a net exporter of semiconductors. It is now a net importer of semiconductors. Explain why.

1. The US both imports and exports apples. Explain why.

1. The US both imports and exports airplanes. Explain why.

Question 2 (8 points each part)

1. (All numbers in this question are fictitious). A $100 million Boeing-757 made in the USA contains imported components for which Boeing pays $25 million. The average tariff included in the price of these imported components is 10 percent. The nominal tariff on a competing Airbus made in the EU is 25 percent. The effective rate of protection that Boeing enjoys, however, is greater than 25 percent. Explain why.

1. Imposing a tariff on an imported good is a bad idea. Explain why. Use the diagram below if you wish. If you use fancy terms like consumers surplus and deadweight loss, explain what they mean. (10 points)

Price

Domestic Supply

A

BPw + t = World Price + Tariff

C E

D FPw = World Price

G

Domestic Demand

Qs Qs’ Qd’ Qd

Quantity of Good Produced and Consumed

1. Imposing a quota on the amount of a good that can be imported is an even worse idea than imposing a tariff. Explain why. (10 points)

1. Many Americans are out of work right now. We’d be better off as a nation if we bought more American-made goods instead of imports. That way, more Americans would have jobs. Putting a tariff on imports is a good idea right now. Do you agree? Explain why. (10 points).

Question 3. Supply and demand for sweatshirts in Mexico and the US are shown below.

Supply and Demand Schedules for Sweatshirts

.

MexicoUS

p P

50 - 50-

40 - 40 -

30 - 30-

20 - 20-

10- 10-

0 6 12 18 q (00s)0 6 12 18 20 (00s)

a. Sketch the Supply and Demand curves for Mexico and for the US on the above axes. (4 pts)

Parts b – e (3 points each response)

b.In the absence of trade,

• How many sweatshirts are produced and sold in Mexico? ______400______

• How many sweatshirts are produced and sold in the US? ______400______

1. Shipping and handling costs are $10 per sweatshirt shipped from Mexico to the US. With free trade,

• What is the price of sweatshirts in the US? ______$30______

• How many sweatshirts do US consumers buy at this price? ______800______

• How many sweatshirts do US producers supply at this price? ______0______

• How many sweatshirts does the US import from Mexico? ______800______

• What is the price of sweatshirts in the Mexico? ______$20______

• How many sweatshirts do Mexican consumers buy at this price? ____0______

• How many sweatshirts do Mexican producers supply at this price? _800______

• How many sweatshirts does Mexico export to the US? ______800______

1. Suppose that China enters the world sweatshirt market and that Chinese made sweatshirts are delivered to North America at a cost of $20 per sweatshirt.

• What price do US consumers now pay for sweatshirts? ______$20______

• How many sweatshirts do US consumers buy at this price? ______1,200______

• What price do Mexican producers now receive for sweatshirts they sell in the US (net of $10 shipping and handling costs)? ______$10______

• What price do Mexican consumers now pay for sweatshirts? (Note: Mexican producers compete with each other as well as with the Chinese for the business of Mexican consumers.) ______$10______

d.(continued) With Chinese producers now delivering sweatshirts to North America at $20 per sweatshirt …

• How many sweatshirts are produced in Mexico? ______400______

• How many sweatshirts do Mexican consumers buy? _____400______

• How many sweatshirts does Mexico now export to the US? ______0______

• How many sweatshirts does China export to North America? _____1,200______

1. Suppose the United States imposes a $5 tariff on sweatshirts imported from China. (Mexican sweatshirts continue to enter the US tariff-free since Mexico is a member of NAFTA. Shipping and handling costs for Mexican sweatshirts sold in the US remain at $10 per sweatshirt.)

• What price do U.S. consumers now pay for sweatshirts? ______$25______

• How many sweatshirts do U.S. consumers now buy? ______1,000______

• How many sweatshirts does the U.S. now import from China? ______600______

• How much tariff revenue does the US government collect? (Show your calculation.)

• How much consumers surplus do US consumers lose because of the tariff? (Show your calculations of US consumers surplus with free trade and of US consumers surplus after the tariff is imposed.)

• Apart from the US government, who gains from this tariff? ______

• Apart from US consumers, who is hurt by this tariff? ______