Name:______
ECN160A, 2011 Midterm2 Professor: FarshidMojaver
(32 pts)1-Factor Movement and Factor Prices: Consider a small open economy and two sectors 1 and 2.
a)Show the effects of immigration on (i) wages, (ii) production mix, and (iii) rents on capital specific to each sector (K1 and K2) in the short run (3, 3, and 6 pts)
b)Answer question (a) in the long run (4 pts)
c)Show the effects foreign direct investment in sector 1 on (i) wages, (ii) production mix, and (iii) rents on capital specific to each sector (K1 and K2) in the short run (3, 3, and 6 pts)
d)Answer question (c) in the long run (4 pts)
(9 points) 2-World Immigration: Using a suitable graph make an argument showing that
a)immigration is beneficial to the immigrants and to the remaining workers in the immigrant sending country but it hurts workers in the host country
b)owners of land/capital in the host country are better of as a result of labor migration
c)worldwide efficiency increases as a result of immigration (world GDP is higher)
3-Offshoring
1)Show that offshoring can lead to improvement of welfare in all participant countries.
2) Show the effect of offshoring on high-skilled to Low-skilled labor wage gap (WH/WL).
3)Show the effect of a uniform reduction in the “cost of doing business” in foreign country on wage gaps in both Home and Foreign countries. Assume that wages in Home are higher than those in Foreign.
4)Show the effects of a reduction in the “cost of doing business” in the service sector of a low-wage foreign country on exports and welfare of the high wage home country.
4-Wage gap in US
1)Use a trade model to explain increased wage gap in US and other countries.
2)Make a counter argument that trade is not responsible for the observed increased wage gap in US (hint: use Harrigan empirical observation presented in the appendix of LN 6)
3)Whatthe empirical tests say about the source of increased wage gap in US.
5- Monopolistic Competition: The diagram below shows the long-run trade equilibrium of a typical US auto maker (with free trade). Use the graph to show the impact of lower international demand for US made cars after the 2008 recession. Describe where the new long run equilibrium occurs, and what has happened to the number of firms and the price they charge.
6-Trade Policy
1)Show that import tariffs in a small country reduce social welfare. State the assumptions under which this conclusion is derived.
2)Show that in general import quotas are inferior to import tariffs.
3)Show that under certain conditions import tariffs can improve the social welfare of a large economy.