International Economics Instructor's Manual Chapter 2 & 3 Solutions

International Economics – 11 th Edition Instructor’s Manual
CHAPTER 2
Answer to Problems
1. In case A, the United States has an absolute advantage in wheat and the United
Kingdom in cloth.
In case B, the United States has an absolute advantage (so that the United Kingdom
has an absolute disadvantage) in both commodities.
In case C, the United States has an absolute advantage in wheat but has neither an
absolute advantage nor disadvantage in cloth.
In case D, the United States has an absolute advantage over the United Kingdom in
both commodities.
2. In case A, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case B, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case C, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case D, the United States and the United Kingdom have a comparative advantage
in neither commodities.
3. In case A, trade is possible based on absolute advantage.
In case B, trade is possible based on comparative advantage.
In case C, trade is possible based on comparative advantage.
In case D, no trade is possible because the absolute advantage that the United States
has over the United Kingdom is the same in both commodities.
4. a) The United States gains 1C.
b) The United Kingdom gains 4C.
c) 3C < 4W < 8C.
d) The United States would gain 3C while the United Kingdom would gain 2C.
(Document1) 3-1 Dominick Salvatore

5) a) The cost in terms of labor content of producing wheat is 1/4 in the United States a
and 1 in the United Kingdom, while the cost in terms of labor content of
producing cloth is 1/3 in the United States and 1/2 in the United Kingdom.
b) In the United States, Pw=$1.50 and Pc=$2.00.
c) In the United Kingdom, Pw=£1.00 and Pc=£0.50.
6) a) With the exchange rate of £1=$2, Pw=2.00 and Pc=$1.00 in the United
Kingdom, so that the United States would be able to export wheat to the United
Kingdom and the United Kingdom would be able to export cloth to the United
States.
b) With the exchange rate of £1=$4, Pw=$4.00 and Pc=$2.00 in the United
Kingdom, so that the United States would be able to export wheat to the United
Kingdom, but the United Kingdom would be unable to export any cloth to the
United States.
c) With £1=$1, Pw=$1.00 and Pc=$0.50 in the United Kingdom, so that the United
Kingdom would be able to export both commodities to the United States.
d) $1.50 < £1.00 < $4.00.
7. a) See Figure 1.
b) In the United States Pw/Pc=3/4, while in the United Kingdom, Pw/Pc=2.
c) In the United States Pc/Pw=4/3, while in the United Kingdom Pc/Pw=1/2.
8. See Figure 2.
The autarky points are A and A' in the United States and the United Kingdom,
respectively. The points of production with trade are B and B' in the United States
and the United Kingdom, respectively. The points of consumption are E and
E' in the United States and the United Kingdom, respectively. The gains from
trade are shown by E > A for the U.S. and E' > A' for the U.K.
9. a) If DW(US+UK) shifted up in Figure 2.3, the equilibrium relative commodity price

of wheat would also rise by 1/3 to PW/PC=4/3. Since the higher DW(US+UK)
would still intersect the vertical portion of the SW(US+UK) curve, the United States
would continue to specialize completely in the production of wheat and produce
180W, while the United kingdom would continue to specialize completely in the
production of cloth and produce 120C.
b) Since the equilibrium relative commodity price of cloth is the inverse of the
relative commodity price of wheat, if the latter rises to 4/3, then the former
falls to ¾.. This means that DC(UK+US) shifts down by 1/3 in the right panel of Figure
2.3.

10. If DW(US+UK) intersected SW(US+UK) at PW/PC=2/3 and 120W in the left panel of
Figure 2.3, this would mean that the United States would not be specializing
completely in the production of wheat.
The United Kingdom, on the other hand, would be specializing completely in the
production of cloth and exchanging 20C for 30W with the United States. Since the
United Kingdom trades at U.S. the pre-trade relative commodity price of
PW/PC=2/3 in the United States, the United Kingdom receives all of the gains
from trade.
11. See Figure 3 on page 15 and the discussion in the last paragraph of Section 2.6b in
the text.
12. a) The Ricardian model was tested empirically by showing the positive correlation
between relative productivities and the ratio of U.S.to U.K. exports to third
countries and by the negative correlation between relative unit labor costs
and relative exports
b) The Ricardian trade model was confirmed by the positive relationship found
between the relative labor productivity and the ratio of U.S. to U.K. exports to third
countries, as well as by the negative relationship between relative unit labor costs
and relative exports.
c) Even though the Ricardian model was more or less empirically confirmed we
still need other models because the former assumes rather than explains
comparative advantage (i.e, it does not explain the reason for the different
labor productivities in different nations) and cannot say much regarding the effect of
international trade on the earnings of factors of production.
d) The United States has a comparative disadvantage in the production of textiles.

Restricting textile imports would keep U.S. workers from eventually moving into
industries in which the United States has a comparative advantage and in which
wages are higher.

CHAPTER 3
Answer to Problems
1. a) See Figure 1.
b) The slope of the transformation curve increases as the nation produces more of
X and decreases as the nation produces more of Y. These reflect increasing
opportunity costs as the nation produces more of X or Y.
2. a) See Figure 2.
We have drawn community indifference curves as downward or negatively
sloped because as the community consumes more of X it will have to give up
some of Y to remain on the same indifference curve.
b) The slope measures how much of Y the nation can give up by consuming one more
unit of X and still remain at the same level of satisfaction; the slope declines
because the more of X and the less of Y the nation is left with, the less satisfaction
it receives from additional units of X and the more satisfaction it receives from
each retained unit of Y.


c) III > II to the right of the intersection, while II > III to the left.
This is inconsistent because an indifference curve should show a given level
of satisfaction. Thus, indifference curves cannot cross.
3. a) See Figure 3.
b) Nation 1 has a comparative advantage in X and Nation 2 in Y.
c) If the relative commodity price line has equal slope in both nations.
4. a) See Figure 4.
b) Nation 1 gains by the amount by which point E is to the right and above point A
and Nation 2 by the excess of E' over A'. Nation 1 gains more from trade
because the relative price of X with trade differs more from its pretrade price
than for Nation 2.
5. a) See Figure 5. In Figure 5, S refers to Nation 1's supply curve of exports of

commodity X, while D refers to Nation 2's demand curve for Nation 1's exports
of commodity X. D and S intersect at point E, determining the equilibrium
PB=Px/Py=1 and the equilibrium quantity of exports of 60X.
b) At Px/Py=1 1/2 there is an excess supply of exports of R'R=30X and Px/Py falls
toward equilibrium Px/Py=1.
c) At Px/Py=1/2, there is an excess demand of exports of HH'=80X and Px/Py rises

toward Px/Py=1.
6. The Figure in Problem 5 is consistent with Figure 3-4 in the text. From the left panel of
Figure 3-4, we see that Nation 1 supplies no exports of commodity X at Px/Py=1/4
(point A). This corresponds with the vertical or price intercept of Nation 1's supply
curve of exports of commodity X (point A).
The left panel of Figure 3-4 also shows that at Px/Py=1, Nation 1 is willing to export
60X (point E). The same is shown by Nation 1's supply curve of exports of commodity
X.
The other points on Nation 1's supply curve of exports in the figure of Problem 5 can
also be derived from the left panel of Figure 3-4, but this is shown in Chapter 4 with
offer curves.


Nation 2's demand curve for Nation 1's exports of commodity X could be derived
from the right panel of Figure 3-4, as shown in Chapter 4. What is important is that
we can use the D and S figure in Problem 5 to explain why the equilibrium relative
commodity price with trade is Px/Py=1 and why the equilibrium quantity traded of
commodity X is 60 units in Figure 3-4.
7. See Figure 6 on page 3-8.
The small nation will move from A to B in production, exports X in exchange for Y
so as to reach point E > A.
8. a) The small nation specializes in the production of commodity X only until its
opportunity cost and relative price of X equals PW. This usually occurs before
the small nation has become completely specialized in production.
b) Under constant costs, specialization is always complete for the small nation.
9. a) See Figure 7.
b) See Figure 8.
10. If the two community indifference curves had also been identical in Problem 9 the
relative commodity prices would also have been the same in both nations in the
absence of trade and no mutually beneficial trade would be possible.
11. If production frontiers are identical and the community indifference curves different
in the two nations, but we have constant opportunity costs, there would be no
mutually beneficial trade possible between the two nations
12. See Figure 11

13. It is true that Mexico's wages are much lower than U.S. wages (about one fifth), but
labor productivity is much higher in the United States and so labor costs are not
necessarily higher than in Mexico. In any event, trade can still be based on
comparative advantage.
App. 1. See Figure 12
Commodity X is the L-intensive commodity in Nation 2 (as in Nation 1) because the

production contract curve bulges toward the L-axis or is everywhere to the left of the
diagonal.
App. 2. Since L and K are released from the production of X in a higher ratio than
are absorbed in the production of Y, wages fall in Nation 2. This leads to the
substitution of L for K in the production of X and Y, so that the K/L ratio falls in the
production of both commodities.




CHAPTER 5
Answer to Problems
1. a) See Figure 1.
b) The slope of the lines measuring K/L of each commodity in Nation 2 fall if w/r rises in
Nation 2 as a result of international trade.
c) The slope of the lines measuring K/L of each commodity in Nation 1 rise if w/r falls in
Nation 1 as a result of international trade.
d) Given the results in parts (a) and (b), international trade reduces the difference in the
K/L in the production of each commodity in the two nations as compared with the
pretrade situation.
2. a) See Figure 2.
b) The comparative advantage of each nation is determined by differences in production

conditions only since tastes are identical.
c) The two nations consume different amounts of the two commodities in the absence of
trade but the same amounts with trade because internal prices differ without trade but are
identical with trade.
3. See Figure 3.
4. See Figure 4 on page 46.
5. See Figure 5.
3. a) Besides a difference in factor endowments, the production frontier of two nations

could differ also because of a difference in technology.
b) A difference in the production frontier of two nations due to a difference in the

technology is prevented by assumption by the H-O model.
c) Another possible cause (besides a difference in production frontiers) of a difference in

relative commodity prices between two nations in the absence of trade is a difference in
tastes.

7. See Figure 6.
8. People in developing countries consume very different goods and services than U.S.
consumers not because tastes are very different from the tastes of U.S. consumers but
because incomes are so different (much lower) than in the United States.



9. a) If tastes change in favor of commodity Y (the commodity of its comparative

disadvantage) in Figure 5-4 for Nation 1, Px/Py will be lower in Nation 1 because
point A will move up and to the left.
b) The effect of the change in tastes examined in part (a) for Nation 1 will cause r/w to
rise in Nation 1.
c) The effect of the changes examined in parts (a) and (b) will be to increase the volume
of trade. These changes will improve the partner's terms of trade.
10. The statement was made by Gottfried Haberler in his Survey of International Trade
Theory, Special Papers in International Economics, No.1 (Princeton, N.J.: Princeton
University Press, International Finance Section, July 1961), p. 18.
While the statement is true, it does not detract from Samuelson's great contribution in
rigorously showing the conditions under which trade would bring about the complete
equality in the returns to homogeneous factors among nations.
11. Internatioal trade with developing economies, especially newly industrializing

economies (NIEs), contributed in two ways to increased wage inequalities between
skilled and unskilled workers in the United States during the past two decades. Directly,
by reducing the demand for unskilled workers as a result of increased U.S. imports of
labor-intensive manufactures and, indirectly, by speeding up the introduction of labor-
saving innovations, which further reduced the U.S. demand for unskilled workers.
International trade, however, was only a small cause of increased wage inequalities in
the United States. The most important cause was technological change.
12. a) Leontief found that U.S. import substitutes were more K-intensive than U.S. exports
even though the United States was the most K-rich nation. This implied factor-
intensity reversal and rejection of the H-O trade model.
b) Kravis found that wages in U.S. export industries were higher than in U.S. import-
competing industries, reflecting the greater productivity of labor in U.S. exports than
in U.S. import substitutes. This was confirmed by Keesing who found that U.S.
exports were more skill intensive than the exports of 9 other industrial nations.
By adding human to physical capital, Kenen succeed in eliminating the paradox.
Baldwin found that including human capital and excluding natural-resource
industries eliminated the paradox.

c) The paradox was seemingly resolved by Leamer, Stern and Maskus, and Salvatore and
Barazesh by comparing the K/L ratio in U.S. production vs. U.S. consumption, rather
than in exports vs. imports when natural-resource-based industries are excluded.
d) Factor-intensity reversal seems to be rather rare in the real world.
13. a) See Figure 7.
b) Factor-intensity reversal could occur if the substitutability of K for L in the production

of X was much greater than for Y and r/w was lower in Nation 2 than in Nation 1.
c) Minhas found factor-intensity reversal to be fairly frequent. However, by correcting an

important source of bias in the Minhas study, Leontief showed that factor-intensity
reversal was much less frequent. Ball tested another aspect of Minhas' conclusion and
confirmed Leontief's results that factor-intensity reversal was rare in the real world.
14. With factor-intensity reversal, a commodity is L-intensive in one nation and K-intensive
in the other. The H-O model would then predict that both nations would export the same
commodity. Since this is impossible, both nations must export the commodity intensive
in the same factor.
If this is the K-intensive commodity, the demand for K will increase in both nations. If it
is the L-intensive commodity, the demand for K will fall in both nations. Thus, the price
of K will either rise or fall in both nations, and international differences in the price of K
will decrease, increase or remain unchanged depending on the rate of change in the price
of K in the two nations.
15. a) By allowing for different technologies and factor prices across countries, nontraded
goods, transportation costs, and by using better and more disaggregated data.
b) Factor endowments broadly defined seem to explain comparative advantage well.
c) We retain a qualified factor-endowments H-O model of international trade.
App. 2. See Figure 8.
App. 4. The effect of the opening of trade on the real income of labor and capital in
Nation 2 (the K-abundant nation) if L is mobile between the two industries in
Nation 2 but K is not is to increase Py/Px and to cause more L to be used in the
production of Y.
Wages then fall in terms of Y but rise in terms of X. On the other hand, the return
on capital increases in the production of Y but falls in the production of X.
At P1 commodity Y is K-intensive (compare point C to point A).

At P2 commodity Y is still K-intensive (compare point D to point B).
App. 6. For the X isoquant e = (K/L)/(K/L) = (3/3-2/4)/(2/4) = 1

slope/slope (2-1)/1
For the Y isoquant e = (4/2-2.5/3)/(2.5/3) = 1.4

(2-1)/1
CHAPTER 6
Answer to Problems:
1. See Figure 1.
2. See Figure 2.
3. See Figure 3.
4. a) T = 1 - /1000-1000/ = 1 - 0 = 1.
1000+1000 2000
b) T = 1 - /1000-750/ = 1 - 250 = 0.86.

1000+750 1750
c) T = 1 - /1000-500/ = 1 - 500 = 0.67.

1000+500 1500
d) T = 1 - /1000-250/ = 1 - 750 = 0.4.

1000+250 1250
e) T = 1 - /1000-0/ = 1 - 1000 = 0.
1000+0 1000


5. a) T = 1 - /1000-1000/ = 1 - 0 = 1.
1000+1000 2000
b) T = 1 - /750-1000/ = 1 - 250 = 0.86.

750+1000 1750
c) T = 1 - /500-1000/ = 1 - 500 = 0.67.

500+1000 1500
d) T = 1 - /250-1000/ = 1 - 750 = 0.4.

250+1000 1250
e) T = 1 - /0-1000/ = 1 - 1000 = 0.
0+1000 1000
Note that the results are identical to those in Problem 4 because we take the absolute
value of exports minus imports or imports minus exports.
6. See Figure 4.
The AC and the MC curves in Figure 4 are the same as in Figure 6-2. However, D and the
corresponding MR curve are higher on the assumption that other firms have not yet imitated
this firm's product, reduced its market share, or competed this firm's profits away. In Figure
4, MR=MC at point E, so that the best level of output of the firm is 5 units and price is
$4.50. Since at Q=5, AC=$3.00, the firm earns a profit of AB=$2.00 per unit and $10.00
in total.
7. a) Monopolistic competition resembles monopoly because under both forms of market

organization the firm produces a product that is unique (i.e., no other firm produces an
identical product).
b) Monopolistic competition is different from monopoly because under monopolistic

competition there are many other firms that produce a similar product. On the other
hand, there is no close substitute for the product sold by a monopolist.
Furthermore, under monopolistic competition, entry into the industry is easy. As a

result, attracted by this firm's profits, more firms enter the industry to produce similar
products. This reduces the monopolistically competitive firm's market share (i.e., its
demand and corresponding MR curves shift down) until we get to the situation
depicted by Figure 6-2 in the text, where P=AC and our firm breaks even. On the other
hand, under monopoly, entry into the industry is blocked, so that the monopolist can

continue to earn profits in the long run.


c) The difference between monopoly and monopolistic competition is important for

consumer welfare because consumers get a greater variety of the commodity at a lower
price with monopolistic competition than with monopoly.
8. A perfectly competitive firm faces an infinitely elastic or horizontal demand curve. This
means that the firm is a price taker and can sell any quantity of the homogenous product at
the price determined at the intersection of the market demand and supply curves for the
commodity.
Both the demand curves faced by the monopolistic competitive firm and the monopolist are
downward sloping, indicating that each can sell more units of the commodity by
lowering its price. However, the demand curve facing the monopolistically competitive firm
generally has a smaller inclination (i.e., it is more elastic) than the demand curve facing
the monopolist because the former sells a commodity for which many good substitute are
available.
9. If the C curve had shifted down only half as much as curve C' in Figure 6-3, the new
equilibrium point would be at P=AC=$2.50 and N=350.
10. See Figure 5 on the previous page.
11. The increased pirating or production and sale of counterfeit American goods without paying
royalties by foreign producers shorten the U.S. product cycle or the time during which the
U.S. firm can reap the benefits from the new product or technology it introduced and thus
reduces the ability of U.S. firms to engage in research and development (R & D) new
product cycles.
With transportation costs specialization would proceed to point C in Nation 1 and point C’
in Nation 2. Pc in nation 1 (the nation exporting commodity X) is smaller than Pc' in Nation
2 (the country importing commodity X) by the relative cost of transporting each unit of
commodity X from Nation 1 to Nation 2. Trade does not seem to be in
equilibrium because transportation costs are expressed in terms of commodity X.
13. See Figure 7 on the next page.
P2 exceeds P1 by the relative cost of transporting one unit of commodity X from Nation 1
to Nation 2.
14. See Figure 8.
CHPATER 7
Multiple-Choice Questions
1. Dynamic factors in trade theory refer to changes in:
a. factor endowments
b. technology
c. tastes
*d. all of the above
2. Doubling the amount of L and K under constant returns to scale:
a. doubles the output of the L-intensive commodity

b. doubles the output of the K-intensive commodity
c. leaves the shape of the production frontier unchanged
*d. all of the above.
3. Doubling only the amount of L available under constant returns to scale:

a. less than doubles the output of the L-intensive commodity
*b. more than doubles the output of the L-intensive commodity
c. doubles the output of the K-intensive commodity
d. leaves the output of the K-intensive commodity unchanged
4. The Rybczynski theorem postulates that doubling L at constant relative commodity

prices:
a. doubles the output of the L-intensive commodity

*b. reduces the output of the K-intensive commodity
c. increases the output of both commodities
d. any of the above
5. Doubling L is likely to:
a. increases the relative price of the L-intensive commodity

b. reduces the relative price of the K-intensive commodity
*c. reduces the relative price of the L-intensive commodity
d. any of the above
6. Technical progress that increases the productivity of L proportionately more than the
productivity of K is called:
*a. capital saving

b. labor saving
c. neutral
d. any of the above
7. A 50 percent productivity increase in the production of commodity Y:
a. increases the output of commodity Y by 50 percent

b. does not affect the output of X
c. shifts the production frontier in the Y direction only
*d. any of the above
8. Doubling L with trade in a small L-abundant nation:
*a. reduces the nation's social welfare

b. reduces the nation's terms of trade
c. reduces the volume of trade
d. all of the above
9. Doubling L with trade in a large L-abundant nation:
a. reduces the nation's social welfare

b. reduces the nation's terms of trade
10. If, at unchanged terms of trade, a nation wants to trade more after growth, then the
nation's terms of trade can be expected to:
*a. deteriorate
b. improve
c. remain unchanged
d. any of the above
11. A proportionately greater increase in the nation's supply of labor than of capital is likely
to result in a deterioration in the nation's terms of trade if the nation exports:
a. the K-intensive commodity

*b. the L-intensive commodity
c. either commodity
d. both commodities
12. Technical progress in the nation's export commodity:
*a. may reduce the nation's welfare

b. will reduce the nation's welfare
c. will increase the nation's welfare
d. leaves the nation's welfare unchanged
13. Doubling K with trade in a large L-abundant nation:
a. increases the nation's welfare

b. improves the nation's terms of trade
14. An increase in tastes for the import commodity in both nations:
a. reduces the volume of trade

*b. increases the volume of trade
c. leaves the volume of trade unchanged
d. any of the above
15. An increase in tastes of the import commodity of Nation A and export in B:
*a. will reduce the terms of trade of Nation A

b. will increase the terms of trade of Nation A
c. will reduce the terms of trade of Nation B
d. any of the above



The firm's AC=AF without and BC with external economies. Thus, at a
given level of output of the firm, the firm's AC are lower (i.e., the firm's AC
curve shifts down) as cumulative industry output expands.

International Economics – 11th Edition Instructor’s Manual
App. 2. Parameter "a" refers to the starting AC (i.e., the AC when output or Q is
zero).
Parameter "b" refers to the rate of decline in AC as cumulative industry
output
increases. Thus, "b" should be negative. Furthermore, the larger the
absolute value
of b, the more rapid is the decline in AC as cumulative industry expands
over time.
CHAPTER 8
Answer to Problems
1. a) Consumption is 70Y, production is 10Y and imports are 60Y (see Figure 1 on
the next page).
b) Consumption is 60Y, production is 20Y and imports are 40Y (see Figure 1).
c) The consumption effect is -10Y, the production effect is +10Y, the trade effect
is -20Y and the revenue effect is $40 (see Figure 1).
2. a) The consumer surplus is $245 without and $l80 with the tariff (see Figure 1).
b) Of the increase in the revenue of producers with the tariff (as compared with
their revenues under free trade), $l5 represents the increase in production costs
and another $15 represents the increase in rent or producer surplus (see Figure 1).
c) The dollar value or the protection cost of the tariff is $l0 (see Figure 1).
3. This will increase the rate of effective protection in the nation.
4. a) g = 0.4 - (0.5)(0.4) = 0.4 - 0.2 = 0.2 = 40%

1.0 - 0.5 0.5 0.5
5. a) g=60%
b) g=80%
c) g=0
d) g=20%
6. a) g=70%

b) See the first paragraph of section 8.3b.
7. See Figure 2.
8. When Nation 1 (assumed to be a small nation) imposes an import tariff on

commodity Y, the real income of labor falls and that of capital rises.
9. Py/Px rises for domestic producers and consumers. As production of Y (the K-

intensive commodity) rises and that of X falls, the demand and income of K rises
and that of L falls. Therefore, r rises and w falls.
10. If Nation 1 were instead a large nation, then Nation 1's terms of trade rise and the
real income of L may also rise.


India is more likely to restrict imports of K-intensive commodities in which India

has a comparative disadvantage and this is likely to increase the return to capital
and reduce the return to labor according to the Stolper-Samuelson theorem.
13. See Figure 4.
14. The volume of trade may shrink to zero (the origin of offer curves).
App. 1. The more elastic SH and SF are, the lower is the free trade price of the commodity
and the lower is the increase in the domestic price of the commodity as a result of
the tariff.
App. 2a. The supply curve of the nation for the commodity shifts up and to the left (as
with the imposition of any tax); this does not affect the consumption of the
commodity with free trade, but it reduces domestic production and increases
imports of the commodity; it also increases the revenue effect and reduces
producers' surplus.
b. The imposition of a tariff on imported inputs going into the domestic production
of the commodity will have no effect on the size of the protection cost or
deadweight loss.
App. 3. See Figure 5 (on the next page).
App. 5. Real w will fall in terms of Y and rise in terms of X. On the other hand, real r
will rise in terms of Y and fall in terms of X. This can be seen by drawing a
figure similar to Figure 8-10, but with the VMPLy curve shifting upward.
App. 6a. See Figure 7.
b. After Nation 1 has imposed an optimum tariff and Nation 2 has retaliated with
an optimum tariff of its own, the approximate terms of trade for Nation 1 is
0.8, while the approximate terms of trade of Nation 2 is 1.25.
c. Nation 1's welfare declines from the reduction in the volume and in the terms
of trade. Although nation 2's terms of trade are higher than under free trade,
the volume of trade has shrunk so much that nation 2's welfare is also likely to
be lower than under free trade.


CHAPTER 9
Answer to Problems:
1. Nations restrict trade either in response to lobbying by the producers of a

commodity in which the nation has a comparative disadvantage or to gain a
strategic advantage in relation to other nations. The first leads to a welfare loss for
he nation as a whole. The second is very difficult to achieve.
2. The partial equilibrium effects of the import quota are:

Px=$1.50; consumption is 45X, of which 15X are produced domestically;
by auctioning off import licenses, the revenue effect would be $15.
3. The partial equilibrium effects of the import quota are:

Px=$2.50; consumption is 40X, of which 10X are produced domestically;
the revenue effect is $45.
4. The partial equilibrium effects of the quota are:

Px=$2; domestic production and consumption are 50X; The revenue is zero.
5. The partial equilibrium effects of the quota are:

Px=$1; consumption is 70X, production is 30X, and revenue is zero.
6. The partial equilibrium effects of a negotiated export quota of 30X are:

Px=$4; domestic production is 40X, of which 10X are consumed at home.
1. An export tariff or quota, as an import tariff or quota, affects the price of the
commodity and domestic consumption and production. But the effects are the
opposite.
8. See Figure 1.
The equilibrium price of the commodity is Px=OC and the equilibrium quantity
is Qx=OB in Figure 1.

9. If the supply curve of the commodity in Figure 1 referred to a cartel of

exporters acting as a monopolist, Px=OF and Qx=OA (see Figure 1).
10. Px is higher and Qx smaller when exporters behave as a monopolist.
11. a) The monopolist should charge P1=$4 in the domestic market and P2=$3 in
Figure 9-5 in Appendix A9.2.

b) This represents the best, or optimal distribution of sales between the two
markets because any other distribution of sales in the two markets gives less
revenue.
12. See Figure 2. To the left of point A, the domestic firm faces higher long-
run average costs of production (LACD) than the foreign firm (LACF). To the
right of point A the opposite is the case.
12. a) If the entries in the top left-hand corner of Table 9-5 were changed to +10,
+10, then both Boeing and Airbus would produce the aircraft without any
subsidy, and so no strategic trade and industrial policy would be needed in the
U.S. or Europe.
b) If the entries in the top left-hand corner of Table 9-5 were changed to +5, +0,
then both Boeing and Airbus would produce the aircraft without any subsidy, and
so no strategic trade and industrial policy would be needed in the U.S. or Europe.
*Note that even though Airbus only breaks even, in economics we include
a normal return on investment as part of costs. Thus, Airbus would
remain in business because it would earn a normal return on investment.
c) If the entries in the top left-hand corner of Table 9-5 were changed to +5, -10,
then both Boeing produces and Airbus does not produce without any subsidy.
With a subsidy of at least $10 million per year, however, Airbus would enter
the market and lead to a loss of $100 million for Boeing unless the U.S.
government would provide a subsidy of at least $5 million per year to Boeing.
14. The answer to part (a) and (b) are presented in Appendix A9.3.
App. 1. See Figure 3 on page 90.
App. 2. In order to maximize to maximize total profits the domestic

monopolist practicing international price discrimination should sell at the
price of Pd=$20 in the domestic market and at the price of Pf=$15 in the
foreign market.
App. 3. By imposing a 100% tax on the production of commodity X and

giving it as a subsidy to producers of commodity Y.
CHAPTER 10

Answers to Problems:
1. If Nation A imposes a 100 percent ad valorem tariff on imports of commodity X

from Nation B and Nation C, Nation A will produce commodity X domestically
because the domestic price of commodity X is $10 as compared with the tariff-
inclusive price of $16 if Nation A imported commodity X from Nation B and $12
if Nation A imported commodity X from nation C.
2. a) If Nation A forms a customs union with Nation B, Nation A will import

commodity X from Nation B at the price of $8 instead of producing it itself at
$10 or importing it from Nation C at the tariff-inclusive price of $12.
b) When Nation A forms a customs union with Nation B this would be a trade-
creating customs union because it replaces domestic production of commodity
X at Px=$10 with tariff-free imports of commodity X from Nation B at Px=$8.
3. If Nation A imposes a 50 percent ad valorem tariff on imports of commodity X from

Nation B and Nation C, Nation A will import commodity X from nation C at the
tariff-inclusive price of $9 instead of producing commodity X itself or importing
it from Nation B at the tariff-inclusive price of $12.
4. a) If Nation A forms a customs union with Nation B, Nation A will import

commodity X from Nation B at the price of $8 instead of importing it from
Nation C at the tariff-inclusive price of $9.
b) When Nation A forms a customs union with Nation B this would be a trade-diverting
customs union because it replaces lower-price imports of commodity X of $6 (from
the point of view of Nation A as a whole) with higher priced imports of commodity
X from Nation B at $8.
Specifically, Nation A's importers do not import commodity X from Nation C

because the tariff-inclusive price of commodity X from Nation C is $9 as compared
with the no-tariff price of $8 for imports of commodity X from Nation B. However,
since the government of Nation A collects the $3 tariff per unit on imports of
commodity X from Nation C, the net effective price for imports of commodity X
from Nation C is really $6 for Nation A as a whole.
5. See Figure 10-1 in the text. Any figure similar to Figure 10-1 in the text would do.
6. The welfare gains that Nation 2 receives from joining Nation 1 to form a customs
Union is given by the sum of the areas of triangles CJM and BHN in Figure 10-1 in
the text. Any similar figure and sum of corresponding triangles would, of course, be
adequate.

7. See Figure 10-2 in the text. Any figure similar to Figure 10-2 in the text would do.
8. The welfare loss that Nation 2 receives from joining Nation 1 to form a customs union
is given by C'JJ'+B'HH'- MNH'J'=$11.25 in Figure 10-2 in the text.
Any similar figure and sum of corresponding triangles minus the area of corresponding
rectangle would, of course, be adequate.
9. See Figure 1 and compare it to Figure 10-2.
10. The net gain from the trade-diverting customs union shown in Figure 1 is given by
C'JJ'+B'HH'-MJ'H'N. As contrasted with the case in Figure 10-2, however, the sum
of the areas of the two triangles (measuring gains) is greater than the area the rectangle
(measuring the loss). Thus, the nation would now gain from the formation of a custom
union. Had we drawn the figure on graph paper, we would have been able to measure
the net gain in monetary terms also.
11. A trade-diverting customs union is more likely to lead to a welfare gain of a member
nation (1) the smaller is the relative inefficiency of nation 3 with respect to nation 1,
(2) the higher is the level of the tariff, and (3) the more elastic are Dx and Sx in nation
2. These can seen by comparing Figure 10-2 in the text with Figure 1 on the next page.
12. See Figure 2. The formation of the customs union has no effect.
13. NAFTA created much more controversy because the very low wages in Mexico led to
great fears of large job losses in the U. S.
14. The possible cost to the U.S. from EU92 arose from the increased efficiency and
competitiveness of the E.U. The benefit arose because a more rapid growth in the EU
spills into a greater demand for American products, which benefits the U. S.
App. Compare points B' and H' in Figure 10-3 with the corresponding points in
Figure 3.



International Economics Instructor's Manual Chapter 2 & 3 Solutions

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International Economics – 11 th Edition Instructor’s Manual

3. In case A, trade is possible based on absolute advantage.

In case B, trade is possible based on comparative advantage.

In case C, trade is possible based on comparative advantage.

4. a) The United States gains 1C.

b) The United Kingdom gains 4C.

c) 3C < 4W < 8C.

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b) In the United States, Pw=$1.50 and Pc=$2.00.

c) In the United Kingdom, Pw=£1.00 and Pc=£0.50.

d) $1.50 < £1.00 < $4.00.

b) In the United States Pw/Pc=3/4, while in the United Kingdom, Pw/Pc=2.

c) In the United States Pc/Pw=4/3, while in the United Kingdom Pc/Pw=1/2.

9. a) If DW(US+UK) shifted up in Figure 2.3, the equilibrium relative commodity price

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d) The United States has a comparative disadvantage in the production of textiles.

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b) Nation 1 has a comparative advantage in X and Nation 2 in Y.

5. a) See Figure 5. In Figure 5, S refers to Nation 1's supply curve of exports of

c) At Px/Py=1/2, there is an excess demand of exports of HH'=80X and Px/Py rises

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7. See Figure 6 on page 3-8.

12. See Figure 11

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App. 1. See Figure 12

Commodity X is the L-intensive commodity in Nation 2 (as in Nation 1) because the

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b) The comparative advantage of each nation is determined by differences in production

4. See Figure 4 on page 46.

3. a) Besides a difference in factor endowments, the production frontier of two nations

b) A difference in the production frontier of two nations due to a difference in the

c) Another possible cause (besides a difference in production frontiers) of a difference in

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9. a) If tastes change in favor of commodity Y (the commodity of its comparative

11. Internatioal trade with developing economies, especially newly industrializing

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d) Factor-intensity reversal seems to be rather rare in the real world.

13. a) See Figure 7.

b) Factor-intensity reversal could occur if the substitutability of K for L in the production

c) Minhas found factor-intensity reversal to be fairly frequent. However, by correcting an

b) Factor endowments broadly defined seem to explain comparative advantage well.

c) We retain a qualified factor-endowments H-O model of international trade.

App. 2. See Figure 8.

App. 5. See Figure 9.

At P1 commodity Y is K-intensive (compare point C to point A).

App. 6. For the X isoquant e = (K/L)/(K/L) = (3/3-2/4)/(2/4) = 1

For the Y isoquant e = (4/2-2.5/3)/(2.5/3) = 1.4

b) T = 1 - /1000-750/ = 1 - 250 = 0.86.

c) T = 1 - /1000-500/ = 1 - 500 = 0.67.

d) T = 1 - /1000-250/ = 1 - 750 = 0.4.

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b) T = 1 - /750-1000/ = 1 - 250 = 0.86.

c) T = 1 - /500-1000/ = 1 - 500 = 0.67.