ECON 611 UCB Monopolistic Competition and Offshoring Questions
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Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
1. Consider a US firms production of automobiles, which uses research and
development and components as inputs. Starting from an equilibrium in which
all production (of final good and inputs) takes place in the US
a. In a PPF diagram, illustrate the gains from outsourcing if the US has comparative
advantage in component production.
b. Now suppose that the relative price of components increases due to regulation of
production in the U.S. Illustrate this change on your diagram (above) and state the
implications for production in the US (below).
1
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
c. Does the US gain from an increase of relative price of components at home? Explain
the intuition.
2. Consider a small country applying a tariff, t, to imports of a good like that represented
in Figure 1.
a. Suppose that the country decides to reduce its tariff to t’. Redraw the graphs for the
Home and import markets and illustrate this change. What happens to the quantity of
goods produced at Home and their price? What happens to the quantity of imports?
Figure 1
2
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
b. Are there gains or losses to domestic consumer surplus due to the reduction in tariff?
Are there gains or losses to domestic producer surplus due to the reduction in tariff?
Illustrate these on your graphs.
c. What is the overall gain or loss in welfare due to the policy change?
3. Consider a large country applying a tariff, t, to imports of a good like that represented
in Figure 2.
Figure 2
a. How does the export supply curve in panel (b) compare to that in the small country
case? Explain why these are different.
3
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
b. Explain how the tariff affects the price paid by consumers in the importing country,
and the price received by producers in the exporting country. Illustrate how the prices
are affected if (i) the export supply curve is very elastic (flat), or (ii) the export supply
curve is inelastic (steep).
4. Rank the following in ascending order of home country welfare and justify your
answers. If two items are equivalent, indicate this accordingly.
a. Tariff of t in a small country corresponding to the quantity of imports M.
b. Optimal tariff of t in a large country corresponding to the same quantity of imports M.
c. Tariff of t’ in a large country corresponding to the quantity of imports M’ > M.
4
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
5. Rank the following in ascending order of home country welfare and justify your
answers. If two items are equivalent, indicate this accordingly.
a. Tariff of t in a small country corresponding to the quantity of imports M.
b. Quota with the same imports M in a small country, with quota licenses distributed to
home firms and no lobbying.
c. Quota of M in a small country with quota licenses auctioned to home firms.
d. Voluntary export restraint of M in a small country.
e. Quota of M in a small country with quota licenses distributed to home firms due to
lobbying.
6. Suppose Home is a small country. Use Figure 3 below to answer the questions.
Figure 3
a. Calculate Home consumer surplus and producer surplus in the absence of trade.
5
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
b. Now suppose that Home engages in trade and faces the world price, P* = $6.
Determine the consumer and producer surplus under free trade. Does Home benefit
from trade? Explain.
c. Concerned about the welfare of the local producers, the Home government imposes
tariff in the amount of $2 (i.e., t = $2). Determine the net effect of the tariff on the
Home economy.
7. Refer to the graphs in Problem 6. Suppose that instead of a tariff, Home applies an
import quota limiting the amount Foreign can sell to 2 units.
a. Determine the net effect of the import quota on the Home economy if the quota
licenses are allocated to local producers.
6
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
b. Calculate the net effect of the import quota on Home welfare if the quota rents are
earned by Foreign exporters.
c. How do your answers to parts (a) and (b) compare with part (c) of Problem 6?
8. Figure 9.2 below shows the free trade equilibrium under perfect competition and
under monopoly (both with the price PW). In this question we compare the welfare of
home country consumers in the no-trade situation and under free trade.
7
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
a. Under perfect competition, with the price PW, label the triangle of consumer surplus
and the triangle of producer surplus. On a graph outline the area of total Home
surplus (the sum of consumer surplus and producer surplus).
b. Based on your answer to part (a) in this question, outline the area of gains from free
trade under perfect competition.
c. Under monopoly, still with the price PW, again label the triangle of consumer surplus
and the triangle of producer surplus.
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Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
d. Based on your answer to part (c) in this question, on a graph outline the area of gains
from free trade under Home monopoly.
e. Compare your answer to parts (b) and (d). That is, which area of gains from trade is
higher and why?
9
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
9. Rank the following in ascending order of Home welfare and justify your answers. If
two items are equivalent, indicate this accordingly.
a. Tariff, t, in a small country with perfect competition.
b. Tariff, t, in a small country with a Home monopoly.
c. Quota with the same imports M in a small country, with a Home monopoly.
d. Tariff, t, in a country facing a Foreign monopoly.
10. Suppose that in response to a threatened antidumping duty of t, the Foreign monopoly
raises its price by the amount, t.
a. On a graph, illustrate the losses for the home country.
10
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
b. How do these losses compare with the losses from a safeguard tariff of the amount t,
applied by the Home country against the Foreign monopolist?
c. In view of your answers to (a) and (b), why are antidumping cases filed so often?
11. Consider the following variation of Table 11.1 for the U.S. semiconductor market.
From Canada, before NAFTA
From Asia, before NAFTA
From Canada, after NAFTA
From Asia, after NAFTA
From the United States
0%
$50
$42
$50
$42
$47
U.S. Tariff
10%
$W
$X
$Z
$X
$47
20%
$60
$Y
$Z
$Y
$47
a. Fill in the values for W, X, Y, and Z.
b. Suppose that before NAFTA the United States had a 20% tariff on imported
semiconductors. Which country supplied the U.S. market? Is it the lowest cost
producer?
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Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
c. After NAFTA, who supplies the U.S. market? Has either trade creation or diversion
occurred because of NAFTA? Explain.
d. Now suppose that before NAFTA, the United States had a 10% tariff on imported
semiconductors. Then repeat parts (b) and (c).
e. In addition to the assumptions made in (d), consider the effect of an increase in hightechnology investment in Canada due to NAFTA, allowing Canadian firms to develop
better technology. As a result, 3 years after the initiation of NAFTA, Canadian firms
can begin to sell their products to the United States for $46. What happens to the U.S.
trade pattern 3 years after NAFTA? Has trade creation or diversion occurred because
of NAFTA? Explain.
12
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
12. Short Answer Questions
a. In the monopolistic competition model, would you expect prices to be higher or lower
as the number of firms increase? Briefly explain why.
b. Explain what is gravity model and how it works.
c. Why is it necessary to use a market failure to justify the use of infant industry
protection?
d. What is a positive externality? Explain the argument of knowledge spillovers as a
potential reason for infant industry protection.
13
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
e. If infant industry protection is justified, is it better for the Home country to use a tariff
or a quota, and why?
f. How is a customs union different from a free trade area? Provide examples of each.
g. Why do some economists prefer multilateral trade agreements over regional trade
agreements?
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Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
13. (Graduate students only). Consider the following graph of a small-economy, who
applies a tariff t to its import.
SDOM
P
PW + t
PW + t
PW
PW
a
b c d
e f g
h i j
D DOM
Q
a. How does a rise in the world price of a good that is imported subject to a constant
specific tariff affect consumer surplus, producer surplus, government revenue and
country welfare in the importing country?
b. For a given world price and a given quantity of imports with free trade, determine how
the various welfare effects of a given tariff, compared to free trade, depend on the
elasticities of domestic supply and domestic demand for the good.
15
Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
c. Suppose that home country domestic supply is perfectly elastic at a price higher than
the world price plus the tariff. Determine the welfare effects of a tariff starting from free
trade.
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Econ 611/811 Homework 3 & 4
Monopolistic Competition; Offshoring; Tariffs and Quotas; International Trade Agreement
Due Date: Dec 7, 2021
Dr. Chenghao Hu
Name__________________________________ ID__________________________________
14. (Graduate students only). Suppose that we are a large country importing a good
subject to a tariff or non-trade barrier (NTB), and that foreign producers of imports then
become more efficient, so that their costs fall. Discuss how will the effects of this change
on the price and quantity of imports differ depending on whether we are restricting
imports with
a. a tariff
b. a quota
c. a voluntary export restraint
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Monopolistic Competition
Outsourcing equilibrium
price of components
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