Midterm assignments

International economics
Lecturer: Ha Truong Minh Hieu

Deadline 23:59 9th June 2024

You must submit one hard copy and one soft copy of your work. The hard copy can be submitted directly to me, while the
soft copy can be submitted via LMS. Late submissions will result in a mark deduction under the Supplemental course guide.
Submissions later than 4 days will not be accepted.

IMPORTANT: You are encouraged to discuss and work with your classmates, but your work must be your own. Plagiarism
is strictly forbidden and will not be tolerated. Plagiarized works will be marked zero.

1. (40pt) For a season, farmers in Phu Quoc village could choose to grow and harvest either 12 bags of chili or 4 bags
of pepper, while farmers in Guntur village could produce 10 bags of chili or 2 bags of pepper.
a. What is each commodity's relative price (opportunity cost) within each village before trading? (3pt)
b. Which village has an absolute/comparative advantage in producing which goods? (4pt)
c. Who should export chili, and who should export pepper? (2pt)
d. Graph out the Possible Production Frontier (PPF) for both villages before the trade, assuming that there is
a constant return to scale. (2pt)
e. What are the mutually beneficial terms of trade range? Show your work. (5pt)
f. Graph out the Possible Production Frontier (PPF) for both villages after the trade and point out the gain
from trade, given that the term of trade is 4 bags of chili for 1 bag of pepper. (3pt)
g. Some people notice the discomfort caused by excessive pepper consumption, so they are spreading
rumours that pepper could cause heartburn! The demand and price for pepper drops as a result. Now, one
pepper bag can only be exchanged for 2 bags of chili. Despite this, the villages continued to trade. How
much does each village gain/lose from trade? (4pt)
h. The rumors were later debunked, and the demand for chili returned to normal. But what if Guntur is
suffering a drought, which reduces its chili output to 8 bags per season. Would trade still be possible?
Would the relative price of pepper be depreciated or appreciated due to the event? (4pt)
i. Suppose that the wage for farmers in Phu Quoc village is 24,000,000 VND per season (3 months) and the
wage for farmers in Guntur is 86,400 INR per season. What is the price of each commodity domestic price
in their respective currency assuming no profit is made and the sale price equals the cost of production.
(3pt)
j. Using the information provided in question (i), suppose that 1 INR is exchanged for 292.62 VND. How much
does chilly and pepper in India would cost in VND? (round up to the nearest ones) (3pt)
k. Using the result of question (j), which village should export chilly and which nation should export pepper?
(2pt)
l. For the trade pattern to be similar to the answer to question (c), what is the range of exchange rate for
1INR and 1000VND? (round up to the nearest tenth) (5pt)
2. (10pt) Draw two sets of axes, one for Portugal and the other for France, measuring labor along the horizontal axis
and capital along the vertical axis.
a. Draw 2 straight lines for Portugal to represent K/L for producing fish and electronics so that fish is more
labor-intensive than electronics. (2pt)
b. Draw 2 straight lines for France representing K/L for producing fish and electronics, making France more
capital-intensive than Portugal. (2pt)
c. According to the Price Equalization Theorem, would r/w in Portugal rise or fall due to free trade? Will K/L
become flatter or stepper as a result of this change? (3pt)
 d. According to The Factor-specific model, how will France's fishing industry be affected by free trade? (4pt)
e. Briefly give examples of the Leontief paradox (3pt)
3. (10pt) Using the same information in question 2. Given that before trade, one piece of electronics was twice as
expensive as fish in Portugal, while the same piece would cost only half as much as fish in France.
a. Graph our PPF for each nation, given there is a diminishing marginal return (or increasing opportunity
cost). Make sure the PPF shows which nation is good at making which goods. (hint: review graphs in
Chapter 3) (3pt)
b. Graph out indifference curves on the PPF for each nation to clearly show the distinction between two
country preferences (before trade). The tangent point of the indifference curve and the PPF should also
be the tangent point of the isovalue curve and the PPF. (3pt)
c. Both nations now agree to trade with the term 1 fish for 1 electronic. Graph out how trade allows
consumers in both countries to benefit. (4pt)
4. (20pt) In an isolated and closed town, the demand and supply of apples are as follows: at Price = $4, the quantity
Demand is 4kg while the quantity supply is 24kg. At price = $0, the quantity Demand is 20kg while the quantity
Supply is 0kg.
a. Identify the Demand and supply curve function for apples in this town. (3pt)
b. What is the Equilibrium price and supply? (2pt)
c. The town now starts to open and trade with other towns, and the price of apples falls to 1 due to free
trade. Graph out the effect of free trade. Determine the consumption, production, and import. (4pt)
d. Calculate the value of consumer surplus and producer surplus before and after free trade. (2pt)
e. The mayor, an apple grower himself, now imposes a 50% ad valorem tariff on imported apples. Graph out
the effect of tariffs. What is the value of the consumption effect, production effect, trade effect, and tax
revenue? (4pt)
f. What is the absolute value of change in consumer surplus and producer surplus before and after tariff?
(3pt)
g. Determine the dead weight loss and the net gain from the tariff. (net gains = change in producer surplus +
tax revenue – change in consumer surplus) (2pt)
5. (10pt) Using the same information from questions 4 and 4a.
a. If a 20% tariff (instead of 50%) was applied to Apple, determine import the tariff's deadweight loss. (2pt)
b. It is almost Christmas, and apple pie is trendy in the town. The demand for apples in this town shifts to
the right to parallel the old demand curve and crosses the horizontal axis at 28kg. Graph out and find the
function of the new demand curve. (2pt)
c. Calculate the new value of deadweight loss after the shift in demand. (2pt)
d. Suppose that instead of a tariff, a quota of 8kgs was applied. Determine the price of apples and dead
weight loss under quota (2pt)
e. Comparing the two forms of restriction, which one is more damaging to the welfare of the town? Show
numerical proof for your arguments. (2pt)
6. (10pt) Kingston Technology, an American company, manufactures 24 thousand 4GB RAM sticks for the domestic
market at the price of $18 for each stick. After a trade agreement between the US and China, the company started
to export some of its sticks to China. Production increased by an additional 4 thousand sticks and Kingston raised
the price of each stick to $21 while domestic demand was reduced by 6 thousand sticks as a result.
a. Identify the supply and demand function curve for 4GB RAM sticks. (2pt)
b. After a certain time, China has been accused of foul play. Kingston strongly believed its partner in China
engaged in Intellectual Property theft to undercut competition and demanded the U.S. government take
action. Export subsidies for Kingston were quick to be provided to ensure fair competition. With a new
influx of funding, the new production of RAM sticks rose to 36 thousand sticks. Determine the value of the
consumption effect, production effect, trade effect, and subsidy value. (2pt)
c. Calculate the deadweight loss of subsidy. (3pt)
d. Is U.S. government interference in free trade justified in this case? Provide a brief argument (no more than
150 words) (2pt)
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