1.Two countries, NZ and AUS, trade with each other. Some industries in each country exhibit internal...

1.Two countries, NZ and AUS, trade with each other. Some industries in each country exhibit internal economies of scale while other industries exhibit constant returns to scale. We should NOT expect to see
Select one:
a. intra-industry trade between NZ and AUS.
b. inter-industry trade between NZ and AUS.

2.Suppose that we have the following inverse supply and inverse demand functions for jandals in a small country called New Zealand:
p = 20 + 2QS and p = 50 – QD
where QS and QD are measured in 1000’s of pairs of jandals. The world price of jandals equals $36. New Zealand has a tariff equal to $6 per pair of jandals. Which of the following is TRUE?
Select one:
a. The price of jandals in New Zealand is $42 per pair. New Zealand will import 3,000 pairs of jandals.
b. The price of jandals in New Zealand is $40 per pair. New Zealand will neither export nor import.
c. The price of jandals in New Zealand is $36 per pair. New Zealand will import 6,000 pairs of jandals.
d. The price of jandals in New Zealand is $42 per pair. New Zealand will export 3,000 pairs of jandals.
c. perfect competition in the industries that are subject to internal economies of scale.
d. small number of firms in the industries that are subject to internal economies of scale.

Solutions

Expert Solution

1. Answer a) intra-industry trade between NZ and AUS

The main reason is because imports and exports in this case occur only with the products which are unable for either of the countries to produce. As we know both the nations have firms with either internal economies of scale or constant returns of scale, meaning that the local industries are performing well and there is no need for them to carry out intra-industry trade between the two nations. Therefore intra industry trade cannot be expected.

While inter- industry trade between these two nations is encouraged to supplement the dearth in products as well as high cost of production.

2. b

p= 20 + 2Qs

=> Qs = 0.5p - 10 (supply)

p = 50 - Qd

=> Qd = 50 - p (demand)

At equilibrium demand = supply

50 - p = 0.5p - 10

p = 40 (which is the local price)

They will neither import nor export because this price is less than the world price plus tariff.

Hope this helps. Do hit the thumbs up. Cheers!

Rahul Sunny answered 1 month ago

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