W2022 - Midterm ECON

ECON 355 - International Trade
Midterm
March 10, 2022
Instructions:
• Write your student number and name on this exam.
• Ensure that your student number and name are on the back of your summary sheet.
• Do not open the exam until instructed.
• This exam is one hour and twenty minutes in length.
• Simple calculators are the only electronic devices allowed.
• Write your answers directly on the exam.
• Submit your summary sheet with your exam.
• Good luck!
Name:
Student Number:
1
1 Multiple-Choice
Clearly, mark your answer directly on the exam by circling the letter associated with your choice.
Choose the best answer; the question will be marked as incorrect if you indicate multiple answers.
Each multiple-choice question is worth 1 point.
1. According to Ricardo:
a) all countries can gain from trade if they export good for which they have an absolute
advantage.
b) one country can gain from trade only at the expense fo another country.
c) all countries can gain from trade if they export goods for which they have a comparative
advantage.
d) all countries lose from international trade.
2. Suppose the world price is $15. With free trade, the domestic monopolist will produce
and the country will import .
a) 18; 10
b) 12; 6
c) 18; 16
d) 12; 16
3. In the Heckscher-Ohlin-Samuelson model, trade will the owners of a country’s factor

and will the good that uses that factor intensively.
a) benefit; scarce; export

b) benefit; scarce; import
c) harm; scarce; export
d) harm; abundant; import
e) benefit; abundant; export
2
4. How many computers will this country export?
a) 0
b) 125
c) 350
d) 500
5. What is the outcome when home imposes a tariff on a product currently produced by a home
firm monopoly?
a) The home firm then will regain its monopoly control over the price.
b) The home firm will be able to charge a higher price (world price + tariff), but it will
become a price taker, just like a competitive firm.
c) Home’s firm will be able to limit quantity and charge a higher price.
d) The monopoly firm will lower price, increase sales, and undercut the foreign competition.
3
2 Short Answer
Show your work to earn partial marks. Write directly on the exam paper. Your answers can refer
to other parts of the question.
6. Suppose Home’s demand for a good is given by QD = 200 − P and supply is given by QS =
2P − 25, and Foreign’s export supply is X ∗ = P − 15.
a) Find the free trade equilibrium (price and quantity of imports). [1 point]
b) Graph the free trade equilibrium (import demand, export supply, and equilibrium values
from b)). [1 point]
4
c) Suppose Home imposes a $3 per unit import tariff. Find the equilibrium with the import
tariff (domestic consumer price, price received by foreign producers, and quantity of
imports). [1 point]
d) Calculate the terms of trade (TOT) change from this import tariff and briefly define
what this is. [1 point]
5
7. In a Ricardian world, Home has 100 units of labour and Foreign has 50 units of labour. In Home,
it takes 3 units of labour to produce a unit of good x, and 2 unit of labour to produce a unit
of good y. In Foreign, it takes 1 units of labour to produce a unit of good x and it takes 2
units of labour to produce good y.
a) Which country has an absolute advantage in producing good x? Which country has a
comparative advantage in producing good x? [1 point]
b) Graph the relative supply curve with PPxy on the vertical axis. Include the values of the
relevant relative prices and quantities. [1 point]
6
−1
Px QH F
x +Qx
c) If preferences are given by the relative demand curve Py
=2 QH F , what is the
y +Qy
free trade price ratio? [1 point]
d) What quantity of good x does Home produce in free trade? [1 point]
7
8. In a specific factors world, a country has 100 units of labour (L), 64 units of capital (K), and
1 1
100 units of land (T). The country’s production function for agricultural goods is Qa = T 2 La2
1 1
and their production function for manufactured goods is Qm = K 2 Lm
2
, where La indicates
the amount of labour used in agriculture and Lm indicates the amount of labour used in
1 1
manufacturing. Note M P La = T 21 and M P Lm = K 21
2La2 2
2Lm
a) Suppose that the price of the agricultural good, Pa , is 3 and the price of the manufac-
tured good, Pm , is 8. Clearly label the total amount of labour (L) and the value of the
marginal product of labour in each sector in the following diagram. [1 point]
w w
Oa Om
b) In the above diagram, clearly show the equilibrium wage and the equilibrium amount of
labour in each sector. Note: you do not need to calculate the values of the equilibrium
wage or equilibrium amount of labour. [1 point]
8
c) Suppose the price of the manufactured good increases (and the price of the agricultural
good remains the same). In the diagram above, demonstrate the change in the (nominal)
wage and the equilibrium amount of labour in each sector. [1 point]
d) Demonstrate the distributional impact of this price increase on land owners. [1 point]

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ECON 355 - International Trade

• Write your student number and name on this exam.

• Do not open the exam until instructed.

• This exam is one hour and twenty minutes in length.

• Simple calculators are the only electronic devices allowed.

• Write your answers directly on the exam.

• Submit your summary sheet with your exam.

3. In the Heckscher-Ohlin-Samuelson model, trade will the owners of a country’s factor

a) benefit; scarce; export

d) What quantity of good x does Home produce in free trade? [1 point]

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