final exam

WEEK-10 Tutorial Questions

1. In 1980 the US automobile industry was in difficulty because of

A. High interest rates on car loans. B. High gasoline prices due to the revolution in

Iran. C. Appreciation of the Japanese yen. D. High emission requirements on cars.

2. In 1981 the Reagan Administration asked the Japanese to apply a “Voluntary Export Restraint” (VER) and export less cars to the US. In the competitive model, Japanese auto companies can benefit from “Voluntary Export Restraint” (VER) to the US

A. If the Japanese manufacturers can appropriate the quota rent and if the quota rent exceeds the loss in producer surplus.

B. Because the US is a small country for Japanese automakers and hence they do not have to lower their export prices.

C. If the increase in their producer surplus is greater than the quota rent accruing to the Japanese companies.

D. If the gain of quota rent to the Japanese companies exceeds the loss in consumer surplus of US consumers.

2. In 1981 the Reagan Administration asked the Japanese to apply a “Voluntary Export Restraint” (VER) and export less cars to the US. In the competitive model, Japanese auto companies can benefit from “Voluntary Export Restraint” (VER) to the US

A. If the Japanese manufacturers can appropriate the quota rent and if the quota rent exceeds the loss in producer surplus.

B. Because the US is a small country for Japanese automakers and hence they do not have to lower their export prices.

C. If the increase in their producer surplus is greater than the quota rent accruing to the Japanese companies.

D. If the gain of quota rent to the Japanese companies exceeds the loss in consumer surplus of US consumers.

3. According to the competitive model the result of the VER on Japanese automobiles should have

A. Reduced the retail price of autos and reduced the domestic production in the US.

B. Reduced the retail price of autos and raised domestic production in the US.

C. Raised the retail price of autos and reduced domestic production in the US.

D. Raised the retail price of autos and raised domestic production in the US.

4. According to the Cournot model if Toyota and GM produced identical cars, had the same marginal costs, and if the transportation costs between Japan and the US was zero, then

A. GM’s sale will be in proportion to the US market relative to the Japanese market.

B. Japanese sales will be higher than GM’s in the US because Japanese cars are more fuel efficient.

C. GM and Toyota will split the US market equally. D. GM and Toyota will charge the same price but

their sales are not predictable by the market.

5. According to the Bertrand model, if Toyota and GM make identical cars at identical marginal costs, and, in addition, we can assume no transportation costs and free trade

A. Toyota will charge a higher price and sell less in Japan.

B. Toyota and GM will charge the same price in both of the markets.

C. GM will charge a higher price in the US but still sell more than Toyota because the US is the larger market.

D. Toyota and GM will split both the Japanese and the US market evenly, but be free to charge different prices.

6. According to Krishna’s “Simultaneous Move” interpretation of VER with Bertrand Competition, if Toyota and GM make identical cars at identical marginal costs, and no transportation costs, if there is a VER on Toyota then

A. GM will choose the pure monopoly price in the US, but Toyota will stay at price equal to marginal cost in the US.

B. GM will choose a price above marginal cost in the US, but Toyota will stay at price equal to marginal cost in the US.

C. GM and Toyota will choose some randomized combination of prices in the US which lies between monopoly price and marginal costs.

D. Both Toyota and GM will charge the monopoly price in the US market.

7. According to Harris’ “Stackelberg leader” interpretation of VER with Bertrand Competition, if Toyota and GM make identical cars at identical marginal costs, and no transportation costs, if there is a VER on Toyota then

A. Toyota and GM will choose prices simultaneously for the US market.

B. Toyota will wait for GM to announce first what GM will charge for the US market.

C. GM will wait for Toyota to announce first what Toyota will charge for the US market.

D. Either GM or Toyota can be the price leader in the US.

7. According to Harris’ “Stackelberg leader” interpretation of VER with Bertrand Competition, if Toyota and GM make identical cars at identical marginal costs, and no transportation costs, if there is a VER on Toyota then

A. Toyota and GM will choose prices simultaneously for the US market.

B. Toyota will wait for GM to announce first what GM will charge for the US market.

C. GM will wait for Toyota to announce first what Toyota will charge for the US market.

D. Either GM or Toyota can be the price leader in the US.

8. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government imposes a tariff on Toyota

A. Both Toyota’s and GM’s sales will increase. B. Both Toyota’s and GM’s sales will decline. C. Toyota’s sales will increase while GM’s will

decline. D. Toyota’s sales will decline while GM’s will

increase.

8. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government imposes a tariff on Toyota

A. Both Toyota’s and GM’s sales will increase. B. Both Toyota’s and GM’s sales will decline. C. Toyota’s sales will increase while GM’s will

decline. D. Toyota’s sales will decline while GM’s will

increase.

9. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government imposes a tariff on Toyota

A. Toyota will only operate in the US market. B. Consumer Surplus in the US declines. C. Consumer Surplus in Japan increases. D. Toyota will have net zero exports in

equilibrium.

9. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government imposes a tariff on Toyota

A. Toyota will only operate in the US market. B. Consumer Surplus in the US declines. C. Consumer Surplus in Japan increases. D. Toyota will have net zero exports in

equilibrium.

10. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government gave an export subsidy to GM to export to Japan,

A. GM’s reaction function will shift outward in Japan and Toyota’s shift inward.

B. GM’s reaction function will shift outward in Japan but inward in the US.

C. GM’s reaction function will shift outward in Japan but Toyota’s will remain unchanged in Japan.

D. GM’s reaction function will shift outward in Japan and Toyota’s will also shift outward, but in the US.

10. If in a Cournot model of duopoly consisting of GM and Toyota, the US Government gave an export subsidy to GM to export to Japan,

A. GM’s reaction function will shift outward in Japan and Toyota’s shift inward.

B. GM’s reaction function will shift outward in Japan but inward in the US.

C. GM’s reaction function will shift outward in Japan but Toyota’s will remain unchanged in Japan.

D. GM’s reaction function will shift outward in Japan and Toyota’s will also shift outward, but in the US.

11. In a Bertrand oligopoly consisting of Toyota and GM a tariff on Toyota will lead to

A. GM lowering its price and producing more in the US market.

B. GM producing a deadweight efficiency loss from its operation in the US market.

C. Toyota lowering its price and increasing sales in the US.

D. An increase in GM’s profits greater than the consumer surplus loss in the US.

11. In a Bertrand oligopoly consisting of Toyota and GM a tariff on Toyota will lead to

A. GM lowering its price and producing more in the US market.

B. GM producing a deadweight efficiency loss from its operation in the US market.

C. Toyota lowering its price and increasing sales in the US.

D. An increase in GM’s profits greater than the consumer surplus loss in the US.

Short Answer Question: What is the key reason behind the fact that a country can improve its welfare with an export subsidy under Cournot competition but not under Perfect competition?

Answer: Under Cournot competition firms make positive profits, i.e., they earn rent. As a result, export subsidy can be used to capture some of the rents from a foreign firm. This is known as rent-shifting motive. This can improve the welfare if the increase in domestic firm’s profit outweighs the distortions subsidy generates. Under perfect competition, firms earn zero profit and there is no rent to grab. Therefore, subsidy only generates distortions and makes the welfare of the imposing country worse off.