Deck 23: Monopolistic Competition and Oligopoly

Question 1

Assume that the comparative-cost ratios of two products- baby formula and tuna fish-are as follows in the nations of Canswicki and Tunata:
Canswicki: 1 can baby formula ?2 cans tuna fish
Tunata: 1 can baby formui ?4 cans tuna fish
In what product should each nation specialize? Which of the following terms of trade would be acceptable to both nations: ( a ) 1 can baby formula ?
cans tuna fish; ( b ) 1 can baby formula ? 1 can tuna fish; ( c ) I can baby formula ?5 cans tuna fish?

Answer 1

Canswicki should produce baby food, and Tunata should produce tuna; (a) acceptable; (b) not acceptable; (c) not acceptable.
Feedback: Consider the following example. Assume that the comparative-cost ratios of two products-baby formula and tuna fish-are as follows in the nations of Canswicki and Tunata:
Canswicki: 1 can baby formula ? 2 cans tuna fish
Tunata: 1 can baby formula ? 4 cans tuna fish
In what product should each nation specialize?
The opportunity cost of producing 1 can of baby formula in Canswicki is 2 cans of tuna fish.
The opportunity cost of producing 1 can of baby formula in Tunata is 4 cans of tuna fish.
Since the opportunity cost of producing baby formula is lower in Canswicki, this implies Canswicki should produce baby formula. This also implies that Tunata should specialize in producing Tuna.
We can also look at the opportunity cost of producing cans of tuna fish (in terms of foregone cans of baby formula).
The opportunity cost of producing 1 can of tuna fish in Canswicki is 1/2 a can of baby formula.
The opportunity cost of producing 1 can of tuna fish in Tunata is 1/4 a can of baby formula.
Since the opportunity cost of producing tuna fish is lower in Tunata, this implies Tunata should produce tuna fish. This also implies that Canswicki should specialize in producing baby formula.
Which of the following terms of trade would be acceptable to both nations:
(a) 1 can baby formula ? 2 1/2 cans tuna fish?
These terms of trade are acceptable. The best Canswicki can do without trade is produce 2 cans of tuna fish for each can of baby formula. If they trade 1 can of baby formula for 2.5 cans of tuna fish they will be better off. Tunata will also trade because they only need to give up 2.5 cans of tuna fish for each can of baby formula. If Tunata produced baby formula themselves they would need to give up 4 cans of tuna fish for each can of baby formula.
(b) 1 can baby formula ? 1 can tuna fish?
These terms of trade would not be acceptable. Canswicki would not be willing to trade 1 can of baby formula for 1 can of tuna fish. They can do better themselves by producing 2 cans of tuna fish for each can of baby formula.
(c) 1 can baby formula ? 5 cans tuna fish?
These terms of trade would not be acceptable. Tunata would not be willing to trade (give up) 5 cans of tuna fish for 1 can of baby formula. They could do better themselves by producing a can of baby food and giving up 4 cans of tuna fish.

Question 2

Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States' most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?

Answer 2

International trade links world economies and is very important both within the United States and internationally. The United States leads the world in the combined volume of exports and imports, as measured in dollars. Other major trading nations are Germany, Japan, the western European nations, and the Asian economies of China, South Korea, Taiwan and Singapore.
In 2009, the United States provided about 8.5 percent of the world's exports. Exports of goods and services made up about 13 percent of total US output. Canada is the United States' most important trading partner quantitatively. About 20 percent of US exported goods were sold to Canadians who in turn provided 15 percent of imported US goods. Although the United States is one of the world's largest exporters, as a percentage of GDP, its exports are 11 percent of GDP and are quite low relative to many other countries. But, U.S exports and imports have more than doubled as percentages of GDP since 1980. A trade deficit occurs when imports exceed exports. The US has a trade deficit in goods. In 2009, US imports of goods exceeded US exports of goods by $517 billion. The United States has a sizable trade deficit with China. In 2009, it was $220 billion.

Question 3

The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following: L02
New Zealand's Production Possibilities Table (Millions of Bushels)
Spain's Production Possibilities Table (Millions of Bushels)
a. What is each country's cost ratio of producing plums and apples?
b. Which nation should specialize in which product?
c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.)
d. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade?

Answer 3

The production possibility curves for the two countries New Zealand and Spain are derived in the following diagrams by plotting the production possibility data for each of the two countries.
Newzealand's production possibility curve
Spain's production possibility curve
In the above diagrams, PPC represents Production possibility curve for each country and TPC represents the trading possibilities curve for each country.
(a) The cost ratio of producing plums and apples in New Zealand can be derived from any two production alternatives say A and B.
Cost ratio =
=
=
=
The cost ratio of producing plums and apples in Spain can be derived from any two production alternatives say R and S.
Cost ratio =
=
=
=
(b) The cost ratio of each country reveals the product in which it should specialize. Spain would specialize in plums; New Zealand would specialize in apples.
(c) Trading possibilities line shows the amounts of the two products that a country can obtain by specializing in one product and trading for the other. The trading possibilities line for the two countries New Zealand and Spain is shown in the above diagram. Since New Zealand specializes in apples, New Zealand will produce 60 apples and since the terms of trade are 1 plum for 2 apples, New Zealand will receive 30 plums. Similarly Spain produces 60 plums but trade gives the country 120 apples.
(d) If the optimum production alternative is B in New Zealand and S in Spain, then
The total production of apples =
=
Total production of plums =
=
After specialization and trade, the total production of apples =
Total production of plums =
Gains from specialization and trade = 60 - 40 apples and 60 - 50 plums
=

Question 4

Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive products, unrelated to resource intensity, relate to international trade? LOl,

Question 5

The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative Ua. Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce?
b. What is the total gain in apparel and chemical output that would result from such specialization?
c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for
units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation?
?

Question 6

Explain: "The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China." Relate your answer to the ideas of Adam Smith and David Ricardo.

Question 7

Refer to Figure 3.6, page 57. Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price of $1, $2, $3, S4, and $5? Use this information to construct the U.S. export supply curve and import demand curve for corn. Suppose that the only other corn-producing nation is France, where the domestic price is $4. Which country will export corn; which county will import it?

Question 8

Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries? How would rising costs (rather than constant costs) affect the extent of specialization and trade between these two countries?

Question 9

What is an export demand curve? What is an import supply curve? How do such curves relate to the determination of the equilibrium world price of a tradable good?

Question 10

Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quotas for the world economy?

Question 11

Draw a domestic supply-and-demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantify? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on ( a ) domestic consumers, ( b ) domestic producers, and ( c ) foreign exporters? How would the effects of a quota that creates the same amount of imports differ?

Question 12

"The potentially valid arguments for tariff protection- military self-sufficiency, intant industry protection, and diversification for stability-are also the most easily abused." Why are these arguments susceptible to abuse?

Question 13

Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies reduce unemployment in one U.S. industry but increase it in another U.S. industry?

Question 14

In 2007, manufacturing workers in the United States earned average compensation of $30.56 per hour. That same year, manufacturing workers in Mexico earned average compensation of $3.91 per hour. How can U.S. manufacturers possibly compete? Why isn't all manufacturing done in Mexico and other low-wage countries?

Question 15

How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what way do foreign firms that "dump" their products onto the U.S. market in effect provide bargains to American consumers? How might the import competition lead to quality improvements and cost reductions by American firms?

Question 16

Identify and state the significance of each of the following trade-related entities: ( a ) the WTO; (b) the EU; ( c ) the Euro Zone; and ( d ) NAFTA

Question 17

What form does trade adjustment assistance take in the United States? How does such assistance promote political support for free-trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other changes in the economy, say, changes in patterns of government spending?

Question 18

What is offshoring of white-collar service jobs and how does that practice relate to international trade? Why has offshoring increased over the past few decades? Give an example (other than that in the textbook) of how offshoring can eliminate some American jobs while' creating other American jobs

Question 19

LAST WORD What was the central point that Bastiat was dying to make in his imaginary petition of the candlemakers?