economic development
shag7a
devreview2.pdf
Economic Development
Problem Set 2
Sherif Khalifa
1. (a) What are the main causes of the World food crisis?
(b) Discuss the agrarian systems prevalent in the Developing world that contribute to
such a crisis?
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2. Consider the following graph for a privately owned natural resource:
MC
MB
20 Quantity
MB/MC
15
25
10
(a) The consumer surplus =
(b) The producer surplus =
3. Consider the following table, and assume the wage is $60:
Worker MPL APL
1 100 100
2 90 95
3 80 90
4 70 85
5 60 80
6 50 75
7 40 70
8 30 65
9 20 60
10 10 55
2
If the resource is privately owned:
(a) The employment level =
(b) The surplus =
If the resource is publicly owned:
(c) The employment level =
(d) The surplus =
4. Consider the following graph for the return to labor cultivating agricultural land.
MPL APL
35 Labor
Return to Labor
40
70
20
Wage
If the resource is privately owned:
(a) The employment level =
(b) The surplus =
If the resource is publicly owned:
(c) The employment level =
(d) The surplus =
3
5. Consider the following graph on the difference between private costs and social costs due to the pollution caused by the production of a certain good:
MCP
MB
125 Quantity
Price
25
20
MCS
15
200
(a) The percentage of the pollution tax paid by consumers =
(b) The percentage of the pollution tax paid by producers =
6. Consider the following table about the technology of producing cars and TVs, where labor is the only factor of production:
1 Car 1 TV
Country 1 20 labor 5 labor
Country 2 50 labor 25 labor
(a) Country 1 has a comparative advantage in :
(b) Country 2 has a comparative advantage in :
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(c) Assume that each country has 1000 workers, draw the production possibility frontier
of each country?
TV
Car
Tv
Car
Country1 Country2
(d) The trade price:
(e) Assume that the autarky production is when both countries devote half of their labor
to produce each good. Now, suppose that country 1 devotes 40% of their labor to produce
cars and 60% to produce TVs, while country 2 devotes 75% of their labor to produce cars and
25% to produce TVs, and then they decide to trade such that the number of cars available for
consumption in both countries after trade is the same as in autarky. Complete the following
table:
Country 1 Country 2
Cars TVs Cars TVs
Autarky
Production & Consumption
Trade
Production
Trade
Consumption
Gains from Trade
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7. Consider the following production possibility frontiers of two countries; the first for a Developing country, and the second for a Developed country:
10 Agriculture
Manufacturing
10
20
20
8 Agriculture
Manufacturing
20
24
10
(a) The autarky price in the Developing country =
(b) The autarky price in the Developed country =
(c) The trade price between the two countries =
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8. Consider the following production possibility frontiers of two countries:
10 Agriculture
Manufacturing
10
20
20
3
75
5
Developing
5 Agriculture
Manufacturing
20
25
10
8
2
4
3
Developed
(a) The autarky price in the Developing country =
(b) The autarky price in the Developed country =
(c) The trade price between the two countries =
(d) The combination of production in autarky in the Developing country =
(e) The combination of production in autarky in the Developed country =
(f) The combination of consumption in autarky in the Developing country =
(g) The combination of consumption in autarky in the Developed country =
(h) The combination of production in trade in the Developing country =
(i) The combination of production in trade in the Developed country =
(j) The combination of consumption in trade in the Developing country =
(k) The combination of consumption in trade in the Developed country =
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9. Consider the following graph of the market for cars.
S
D
15 Quantity
Price
70
60
40
301710 40
In the case of autarky:
(a) The quantity of domestic car production =
(b) The price of domestic cars =
In the case of free trade:
(c) The quantity of imported cars =
(d) The price of cars =
If the country imposes a tariff on imported cars:
(e) The quantity of imported cars =
(f) The tariff imposed on every imported car =
(g) The import revenues collected by the government =
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10. To produce a boat, you need wood as an intermediate good. If this country imports both boats and wood, a 10% tariff rate can be imposed on boat imports, and a 5% tariff rate
can be imposed on wood imports. The price of a boat is $1000 before the tariff, and the price
of one unit of wood is $100. Knowing that three units of wood are required to produce one
boat.
(a) The value added before both tariffs are imposed =
(b) The value added after both tariffs are imposed =
(c) The value added after imposing a tariff on boats only =
(d) The value added after imposing the tariff on wood only =
(e) The effective rate of protection after imposing both tariffs =
(f) The effective rate of protection if only the tariff on boats is imposed =
(g) The effective rate of protection if only the tariff on wood is imposed =
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11. Consider the following balance of payments of a country:
Item Amount
Exports 35
Imports 65
Investment income 2
Debt service payments 20
Net remittances 5
Foreign direct investment 7
Foreign portfolio investment 8
Resident capital outflow 30
(a) The balance in the current account =
(b) The balance in the capital account =
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12. If the exchange rate between the Mexican Peso and the U.S.$ is 3 Pesos=1$. If this rate changed to 2 Pesos=1$.
(a) Are the Mexican exports cheaper or more expensive due to this change?
(b) What can the Mexican policy makers do to return to the initial exchange rate?
(c) Are the American exports cheaper or more expensive due to this change?
(d) What can the American policy makers do to return to the initial exchange rate?
If the exchange rate between the Mexican Peso and the U.S.$ is 3 Pesos=1$. If this rate
changed to 4 Pesos=1$.
(e) Are the Mexican exports cheaper or more expensive due to this change?
(f) What can the Mexican policy makers do to return to the initial exchange rate?
(g) Are the American exports cheaper or more expensive due to this change?
(h) What can the American policy makers do to return to the initial exchange rate?
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