a 10.2. SINGLE MARKET. Suppose that two countries, initially in autarchy, decide to cre- ate a single market. For simplicity, assume that, in both economies, there is only one product. Demand for this product is given by D₁ = Si (a-pi), (i=1,2), where S; is measure of country i's size. Upon the creation of a single market, total demand is given by the horizontal sum of the two initial demands. Assuming there is free entry and that firms compete a la Cournot, determine the equilibrium number of firms in autarchy and after the completion of the single market. Interpret the results.
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- Consider a region with two export products (gloves and socks) and two local goods (tattoos and manicures). The production of each export good is subject to localization economies, so each city specializes in one export good. According to Mr. Wizard, “If my two assumptions (one for export products and one for local goods) are correct, all the cities in the region will be the same size.” Assume that Mr. Wizard’s logic is correct. List his assumptions and explain why together they imply the region’s cities will be the same size.Suppose that the world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the linear demand and supply equations. Now suppose the world supply curve you derived above consists of competitive supply and OPEC supply. If the competitive supply equation is: SC = 7.78 + 0.29P, what must be OPEC's level of production in this equilibrium? Now suppose social and political unrest in some non-OPEC producing countries reduced the competitive supply by 30 percent, what happens to the world price of crude oil?Consider an international economy consisting of home and foreign coun- tries. There are two factors: capital (K) and labor (L) and two goods: clothing (C) and food (F): The two countries share the same constant re- turns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual proper- ties. Assume that at autarky both countries produce both goods. All the prices are in terms of units of food. Thus, the price of food is 1: The home country is labor abundant: Here, L and K are home endowments of labor and capital and Land Kare foreign endowments of labor and capital. Assume that food industry is capital intensive and clothing industry is labor intensive. All markets are competitive. (a) Define the following terms: Home country is labor abundant. (b) Draw the relative supply curves of home and foreign countries and the common relative demand curve. Use PC/PF in the vertical axis and QC/QF in the horizontal…
- If economy is open to foreign trade of good X, imposing a tariff will reduce total surplus (total surplus being defined as consumer + producer surplus). Which of the following ideas best describes why we observe tariffs being use in practice? Basically, what is the effect of tarrifs? a. The government can be under political pressure to implement inefficient economic policy. b. The tariff revenue raised will outweigh efficiency losses. c. Economic analysis does not fully explain efficiency losses. d. Economic stability is not often a political incentive.Consider a simplified example of two countries - Singapore and Indonesia - producing two goods – telecommunications equipment and electrical circuit apparatus. Using all its resources, Singapore can produce either 50 telecommunications equipment, or 100 electrical circuit apparatus. Using all its resources, Indonesia can produce either 1,000 telecommunications equipment, or 5,000 circuit apparatus. (a) Which country/countries has/have the absolute advantages and the comparative advantages in the production of telecommunications equipment, and of electrical circuit apparatus? Explain and show. (b) Consider the case of constant opportunity cost. What will be the resulting patterns of trade, terms-of-trade, and the aggregate production and consumption? Provide a diagram to illustrate, with telecommunications equipment on the y-axis. (c) It is found that contrary to the above, there is no complete specialisation in both Singapore and Indonesia. Instead, Singapore partially specialises in…Consider an international economy consisting of USA and China. There are two factors: capital (K) and labor (L) and two goods: manufacture(M) and food (F): The two countries share the same constant returns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual properties. At autarky (before trade) and after trade opens, both countries produce both goods. All the prices are in terms of units of food. Thus, the price of food is 1: The USA is capital abundant: Here, L and K are USA endowments of labor and capital and Land Kare Chinese endowments of labor and capital. Assume that food industry is capital intensive and manufacturing is labor intensive. All markets are competitive. (a) Define the following terms: manufacture industry is labor intensive. (b) Draw how the relative supply curves of USA and China might look like and explain their relative positions using the Rybczynski theorem. Use PM/PFon the…
- Two firms, A and B, are contemplating exporting a local fruit called durian to another country that has strong demand for durian. If both firms export their durians, each firm can earn an export revenue of $25 million. If both firms do not export, each firm can earn a revenue of $12 million from their own domestic market. If one of them exports durians and the other does not export, the firm that exports durians can earn an export revenue of $50 million. But the non-exporting firm will earn a revenue of $18 million. (a)If both firms make a decision simultaneously, construct and analyse a payoff matrix and solve for the Nash equilibrium. Explain whether this is the prisoner’s dilemma game. (b) Suppose Firm A can make a decision before Firm B. Construct and analyse a decision tree model and determine the payoffs to both firms. Does timing matter in this game?Three countries, Hungary, Bulgaria, and Czech Republic, have Ricardian technologies as listed in the table below and can produce two types of goods, namely butter and beer. Number of labor units required to produce one unit of output Country Butter Hungary Bulgaria Czech Republic 234 4 Beer 4 7 5 Which country has an absolute advantage in the production of beer and which country in butter?Two countries, Marland and Teckana, can produce either clothing or food using all their available resources at constant opportunity cost. The table below shows the daily production of clothing or food in Marland and Teckana. Clothing Food Marland 120 20 Teckana 80 20 (a) Which country has the absolute advantage in producing food? Explain. (b) Which country has the comparative advantage in producing food? Explain. (c) Assume the two countries specialize based on their comparative advantage. If the two countries engage in trade and one unit of food is exchanged for 5 units of clothing, will these terms of trade be mutually beneficial? Explain. (d) Suppose Teckana invented new equipment to only increase the production of clothing. (i) Draw a correctly labeled graph of Teckana’s initial production possibilities curve, with clothing on the horizontal axis and food on the vertical axis. Plot the numerical values above on the graph. (ii) Show the effect of the new…
- Suppose there is trade between Spain and France Suppose that each produce only two goods, and that they each have $140,000 of resources to spend on the production of these goods. France• France produces one unit of oil at a cost of $5 per unit. • France can produce one unit of beef at a cost of $17 per unit. Spain• Spain produces one unit of oil at a cost of $11 per unit. • Spain produces one unit of beef at a cost of $21 per unit. a)Which country has the comparative advantage in producing oil? Which has the comparative advantage in producing beef? b)Draw the Production Possibilities Frontier (PPF) for Spain under autarky. Draw this PPF with oil on the x-axis and beef on the y-axis. Label both the x-intercept and y-intercept Suppose now that Spain and France start trading with each other at a rate of 3 units of oil for 1 unit of beef. C) Draw the Production Possibilities Frontier (PPF) for Spain under this trade agreement. D) Draw this PPF with oil on the x-axis and beef on the…In 1938, major powers met in Munich to discuss Germany’s demands to annex part of Czechoslovakia. Let us think of the issue as the proportion of Czechoslovak territory given to Germany. Possible outcomes can be plotted on a single dimension, where 0 implies that Germany obtains no territory and 1 implies that Germany obtains all of Czechoslovakia: Most countries at Munich (“Allies” for short) wish to give nothing to Germany: their ideal point is 0, which gives them utility of 1. Their worst possible outcome is for Germany to take all of Czechoslovakia; hence an outcome of 1 gives them utility of 0. In between these extremes, the Allies could propose a compromise, X, which gives them utility of 1 – X. The question for the Allies is whether to propose a compromise or fight a war with Germany, which they are sure will ensue if they offer nothing. If they propose a compromise and Germany accepts, they get a payoff of 1 – X. If they fight, they win with probability p and lose with…In 1938, major powers met in Munich to discuss Germany’s demands to annex part of Czechoslovakia. Let us think of the issue as the proportion of Czechoslovak territory given to Germany. Possible outcomes can be plotted on a single dimension, where 0 implies that Germany obtains no territory and 1 implies that Germany obtains all of Czechoslovakia: Most countries at Munich (“Allies” for short) wish to give nothing to Germany: their ideal point is 0, which gives them utility of 1. Their worst possible outcome is for Germany to take all of Czechoslovakia; hence an outcome of 1 gives them utility of 0. In between these extremes, the Allies could propose a compromise, X, which gives them utility of 1 – X. The question for the Allies is whether to propose a compromise or fight a war with Germany, which they are sure will ensue if they offer nothing. If they propose a compromise and Germany accepts, they get a payoff of 1 – X. If they fight, they win with probability p and lose with…