Name :(PLEASE PRINT)_______________________________________Grade:____.
Multiple Choice – 25 questions – 1.5 point each – 30 points (30 %).
Identify by writing the letter choice that best completes the statement or answers the question.it in the space provided. DO NOT CIRCLE.
1. Foreign Direct Investment (FDI) refers to: _____
the hot money that an investor needs to get registered in a foreign stock exchange to make investments, and have the liberty to sell and take back the stocks purchased earlier.
the flow of funding provided by an investor or lender to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls.
a method of funding business adopted by a foreign investor by participating directly in the secondary markets of a country, through investments in the country’s stocks or bonds.
the passive holding of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities issued by the investor.
The figure given below represents the domestic market for wheat in a small country. Imports of wheat are prohibited. _____
Price
($ per bushel)
Price
($ per bushel)
0
0
$160
$160
$180
$180
Dd (domestic demand curve)
Sd (domestic supply curve)
World price
Quantity
(millions of bushels)
120
60
150
40
Subsidy
Dd (domestic demand curve)
Sd (domestic supply curve)
World price
Quantity
(millions of bushels)
120
60
150
40
Subsidy
The production effect of the subsidy amounts to:
$200 million.
$300 million.
$1 billion.
$2.2 billion.
An export subsidy imposed by a large country can be more damaging to national welfare than an export subsidy imposed by a small country because: _____
the production effect is necessarily larger for the large country.
the consumption effect is necessarily larger for the large country.
the terms of trade worsen for the large country but not for the small country.
the net national gains of the large country are overshadowed by the net welfare loss of the world.
4. Which of the following is valid for a “first-best” world? _____
Social Marginal Benefit (SMB) > Price (P) = Buyer’s Private Marginal Benefit (MB) = Seller’s Private Marginal Cost (MC) = Social Marginal Cost (SMC)
Social Marginal Cost (SMC) > Price (P) = Buyer’s Private Marginal Benefit (MB) = Seller’s Private Marginal Cost (MC) = Social Marginal Benefit (SMB)
Price (P) = Buyer’s Private Marginal Benefit (MB) = Seller’s Private Marginal Cost (MC) = Social Marginal Cost (SMC) = Social Marginal Benefit (SMB)
Social Marginal Benefit (SMB) > Social Marginal Cost (SMC )
5. An export subsidy can be good for a country if: _____
the subsidy allows the country’s only exporting firm to capture the entire world market.
the subsidy decreases the export price so that the export quantity increases.
the subsidy is offset by a countervailing duty.
the international market for the export product is highly competitive.
6. The nationally optimal tariff is the tariff for which: _____
the production effect is equal to the consumption effect of the tariff.
the government collects the highest tariff revenue.
the difference between the government tariff revenue and the sum of consumption and production effect is the highest.
the difference between the part of the tariff paid by the exporters and the welfare loss associated with the consumption and production effects is the highest.
7. A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country’s government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic consumers to: _____
gain $7 million.
lose $7 million.
lose $70 million.
lose $77 million
8. A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: _____
World price of wine (free trade): $20 per bottle
Domestic production (free trade): 500,000 bottles
Domestic production (after tariff): 600,000 bottles
Domestic consumption (free trade): 750,000 bottles
Domestic consumption (after tariff): 650,000 bottles
The imposition of the tariff on wine will cause the surplus of the domestic producers to _____ by _____.
rise; $1 million
rise; $500,000
fall; $2.5 million
rise; $2.75 million
9. The figure given below shows a situation where the producers of good X are forming an international cartel. Here, MR = Marginal Revenue, MC = Marginal Cost, and P = Price. The cartel uses monopoly pricing for its output. _____
Price
(dollars per unit)
Price
(dollars per unit)
0
0
300
300
500
500
600
600
1,000
1,000
1,500
1,500
MC curve of cartel (= supply curve if there is perfect competition)
Demand
MR
Quantity
(Millions of units)
100
150
MC curve of cartel (= supply curve if there is perfect competition)
Demand
MR
Quantity
(Millions of units)
100
150
How much would the consumer surplus fall after the formation of the cartel?
$50 billion
$42.5 billion
$15 billion
$20 billion
10. Which of the following is NOT true of nontariff barriers to imports? _____
Nontariff barriers can limit imports with greater certainty than tariffs.
Unlike tariffs, the nontariff barriers do not increase the price of the imported goods in the domestic markets.
Some nontariff barriers create uncertainty about the conditions under which imports will be permitted.
Like tariffs, nontariff barriers also result in a net welfare loss in a small country.
11. Which of the following correctly identifies the impact of tariffs on the producers of import-competing products in the imposing country? _____
They can price their products higher than the imported goods.
They can expand their production and sales.
They are forced to go out of business in the long run.
They are forced to charge a price equal to the average cost of production.
12. If the imposition of tariff on a commodity alters the relative prices of the imposing country’s exports to its imports, it is referred to as the: _____
total price effect of the tariff.
production effect of the tariff.
consumption effect of the tariff.
terms-of-trade effect of the tar
13. At free-trade prices, a tennis racquet in country A, a small country, sells for $100 and contains $40 worth of aluminum inputs and $30 worth of plastic. In country A, the nominal tariff rates are 40% on tennis racquets, 20% on aluminum, and 10% on plastic. Based on this information, what is the effective rate of protection for the racquet industry in country A? _____
96⅔%
40%
63⅓%
10%
14. The figure given below shows the market for MP3 players in a small country. Dd and Sd are the domestic demand and domestic supply curves of the MP3 players before the imposition of the quota. (Sd + QQ) is the total available domestic supply curve after the quota has been imposed. How many MP3 players can be imported from abroad after the quota is imposed? _____
Price
Price
$90
$90
$80
$80
0
0
Dd
Sd
World price
Domestic price with quota
Quantity
(Millions of MP3 players per year)
10
17
12
22
Sd + QQ
Quota
QQ
Dd
Sd
World price
Domestic price with quota
Quantity
(Millions of MP3 players per year)
10
17
12
22
Sd + QQ
Quota
QQ
2 million.
5 million
12 million
17 million
15. Which of the following ways can an MNE adopt to reduce its exposure to political risks in its host country?
By threatening to cease all exports of its products to the host country _____
By equating its physical assets in the host country with its local borrowings
By establishing more than one affiliate in the host country
By negotiating with the host country’s government to clear off its debts
16. Which of the following is true of a voluntary export restraint (VER)? _____
A voluntary export restraint ensures that foreign exporting firms are unable to exercise monopoly power.
A voluntary export restraint usually requires that the foreign exporting firms act like a cartel, restricting sales and raising prices.
A voluntary export restraint generates more revenue for the government than a tariff or quota.
Voluntary export restraints have only been used by the poor and developing nations to protect their domestic industries.
17. Under which of the following situations will a tariff imposed by a country fail to reduce imports by as much as expected? _____
The current tariff rate is less than the prohibitive tariff rate.
The foreign export quantity supplied of the good imported by this country is more responsive to changes in the world price than was expected.
The domestic supply of the import-competing products is more price-elastic than was expected.
The domestic quantity demanded of the imported product is less responsive to price changes than was expected.
18. A domestic monopoly producing a close substitute of an imported product would prefer to be protected by a quota than a tariff that results in the same amount of imports because: _____
the deadweight loss will be smaller with a quota.
after the imposition of the tariff the price of the imported good declines in the domestic market.
unlike a tariff, a quota does not generate revenue for the government.
a quota allows the firm to charge a higher price.
19. The figure given below shows the market for shoes in the U.S. The domestic price line with tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of shoes respectively. _____
Dd
Sd
World price
Domestic price with tariff
Quantity
D1
S1
D0
a
b
c
d
S0
Price
0
Dd
Sd
World price
Domestic price with tariff
Quantity
D1
S1
D0
a
b
c
d
S0
Price
0
Following the imposition of tariff, the domestic consumer surplus _____ by the area _____.
increases; c + d
decreases; d
decreases; (a + b + c +d)
increases; (b + d)
20. occurs when a firm temporarily charges a low price in the foreign export market, with the purpose of driving its foreign competitors out of business. _____
Persistent dumping
Cyclical dumping
Predatory dumping
Seasonal dumping
21. Which of the following is true of a common market? _____
The member countries export similar products to the non-member countries.
The member countries do not import any good from the non-member countries.
The member countries have identical monetary and fiscal policies.
There is free movement of capital and labor among the member countries.
22. Multinational enterprises use transfer pricing to: _____
lower prices of their products and gain market share.
reduce their global tax burden.
move products to the markets where the demand for those goods is relatively inelastic.
provide managers in a foreign affiliate with an incentive to maximize local profit.
23. Which of the following correctly identifies the impact of the formation of NAFTA on Mexico?___
NAFTA allows Mexico to better exploit its comparative advantage based on low-skilled workers in such products as apparels, food crops, etc.
Mexico’s import of financial services and high-tech equipment from the U.S. has declined.
After Mexico joined NAFTA, the average wage rates for the unskilled workers have declined.
Mexican exports of fruits and vegetables to the United States declined substantially.
24. In a “second-best” world: _____
tariffs are economically optimal.
private actions are dictated by government agencies.
social marginal cost of a transaction equals social marginal benefit.
private actions do not lead to the best possible outcomes for society.
25. Countries having comparative advantages based on land and in various natural resources are most
likely to: ______
export products like gold, coffee, or cocoa.
export manufactured goods.
experience biased growth.
experience rapid accumulation of capital.
B. Filling the blank questions – 15 Questions – 1.33 points each – 20 points (20%)
one-dollar one-vote metric
infant industry argument
Uruguay Round
monopsony power
VER – voluntary export restraint
Externalities or spillover
effective rate of protection
second-best world
monopoly power
import quota
dying industry argument
internalization advantage
predatory dumping
MNE Multinational enterprise
WTO – World Trade Organization
The _______________________________________________was formed in 1995 as the successor to the GATT, to oversee global ruling of government policies toward trade and to provide legal forum for negotiation of global agreements to reduce trade barriers and disputes.
If Markets are competitive ______________________________________sets the maximum quantity of imports leading to the same effects as a tariff that results in the same importing quantity.
_____________________________________________ agreements also began the process of liberalizing trade in agricultural products and in services, as well as requiring members to provide minimum levels of ownership protection for intellectual property.
The ____________________________ _______________________ is to enjoy full control of the foreign use of their firm specific trade mark, specially from its intangible assets such as proprietary technology, marketing and financial capabilities, brand names, and managerial practices.
The _____________________________________________________________ measures the percent effect of the entire tariff structure on the value added per unit in each industry.
According to the_______________________________________, can create a distortion because the powerful seller restricts output to raise price charged to buyers and consequently increase profits.
____________________________________________ implies that importing countries threaten foreign exporters with stiff barriers if they do not agree to restrict exports by themselves.
_________________________________________asserts that a temporary tariff is justified because it cuts down on imports while the incipient industry learns how to enjoy production cost advantage of economies of scale.
_______________________ ___________________________ are net effects on parties or bystanders other than those agreeing to buy or sell in the open marketplace.
The use of __________________________ ________________________ occurs when a firm temporarily charges a low price in the overseas market, with the purpose of driving its foreign competitors out of business.
When the ______________________________________is applied, then a tariff negative effects used to measure the net loss to the importing country and to the world as whole becomes clear.
Distortions are the result from ongoing gaps between the private and social benefits or costs of an economic activity. So, we live in a _____________________________________________ where private actions will not lead to the best possible outcomes for society’s welfare.
A ____________________________________________aiming to cut how much taxes it pays, these large global companies can have their units in high-tax country be overcharged or underpaid for goods and services that the unit buys or sell an affiliate in a low-tax country.
_______________________________________________________ suggests that since social and optimal values are already included in private incentives. When we projected in society’s welfare using supply and demand curves, leading us to the right choice without government intervention, if import competition is driving domestic producers out of business, so be it.
The United States of America has _______________________________________ because as a large country it can affect the price at which foreigner countries can supply imports.
C. Essay – Mandatory – (minimum) 300 words – answer all three questions – 40 points qualitative & quantitative scale (40%).
1- What is the minimum quantitative information you need to calculate the net national loss from a tariff in a country? “tariff on imports of a product hurts domestic consumers of this product more than it benefits domestic producers of the product”? Do you agree or disagree? Use the diagrams below to describe in words, explain how you will use the numbers to identify and compute, first the what is the production effect of a tariff? Then what is the consumption effect of a tariff?
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2- Consider figure the figure below, which shows what a cartel can do if it can act as a monopolist as the diagram below the cartel supplies the entire world market and answer the following questions:
What is the cartel’s profit-maximizing price and quantity of this cartel? What is the consumer surplus and the cartel’s profit maximizing point? If forced to behave as purely competitive cartel’s. Show the point of purely competitive cartel competitive price and quantity using the graph. (Hint: Make sure you show your work as you answer it using full conclusive sentences?
Create a horizontal table to show the supply quantities at world prices from $10, $15, $20, $25, $30, $35, and $40. Consider a new outside source of supply that will provide amounts of oil that vary with the world price, according to the following schedule: (For instance, if the world price is $15, the outside supply is 5 million barrels per day.).
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FIGURE 5.4
Efficiency losses (or deadweight losses).
3- Q1 = 20 bags. Q2 = 15 bags. Q3 = 27 bags. The market equilibrium price is $45 per bag. The price at a is $85 per bag. The price at c is $5 per bag. The price at f is $59 per bag. The price at g is $31 per bag. Apply the formula for the area of a triangle (Area = ½ × Base × Height) to answer the following questions. LO2
What is the dollar value of the total surplus (producer surplus plus consumer surplus) when the allocative efficiency output level is being produced? How large is the dollar value of the consumer surplus at that output level?
What is the dollar value of the deadweight loss when output level Q2 is being produced? What is the total surplus when output level Q2 is being produced?
What is the dollar value of the deadweight loss when output level Q3 is produced? What is the dollar value of the total surplus when output level Q3 is produced?
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