CECN 707 Economics of International Trade Assignment
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CECN 707 Economics of International Trade Assignment
Submission Instructions:
- Submit all problems in one MS word file. For problem 2 include all your tables and graphs
in the MS word file. Any other formats will not be graded.
- If more than one file is submitted, only one randomly selected file will be graded.
- You must submit your files on the Assignment 2 section of D2L only. Do not forward to
your instructor. All email attachment forms or hardcopy forms of submissions will NOT be
accepted.
- The due date of the assignment is Monday, June 29th 2020 at 11:59pm.
- This assignment weighs 20% of your final grade.
Problem 1. (Monopolistic competition) [week 5] (25 marks)
Consider two countries that are freely trading in differentiated products. Each producer in the
industry is subject to increasing returns to scale, derived from fixed costs of production. In
particular, the cost function of a firm in the industry is linear with respect to output, with fixed
costs of 150 and variable costs of 25 per unit of output. The demand function for each
differentiated product is equal to
Q = S ⌈ │ ⌊ 1 n– 1 2 ( P – P ) ⌉ │ ⌋
where S is size of the market, P is the price charged by the producer and P is the average price
in the industry. There is free entry in the industry. Assume that the size of the market is 2,050 in
the Home country and 4,025 in the Foreign country.
- a) Compute the equilibrium price that any producer will charge, as a function of the number of
firms in the industry and the size of the market.
CECN-707 Economics of International Trade (online course) Ryerson University Dr. Emilia Barbu Spring/Summer 2020 b) Write down the average costs faced by any firm, as a function of the number of firms in the
industry and the size of the market.
- c) Compute the number of firms (in the long run), the price charged for each product, and the
quantity produced by each firm in the industry in the free trade equilibrium. Show it in a graph.
- d) Assume now that entry in the market is not free: each firm has to pay a license fee of 336 to its
own government, to be renewed every year, in order to participate in the market. Compute the
number of firms (in the long run) in the free trade equilibrium under this new situation.
- e) What happens to the consumers’ welfare? Explain. CECN 707 Economics of International Trade Assignment
Problem 2. (Trade and wages) [weeks 6 and 7] (30 marks)
Use table 11-10-0148-01 from the Statistics Canada database to obtain a table with Canadian
median earnings (in dollars) for individuals in the manufacturing sector by levels of education
(scroll down on the “characteristics” options to get the different levels of education) for the period
1990-2011.
- a) Compute the wage for each type of education relative to the wage of individuals with only
elementary education (that is, for each education level, divide its wage by the wage earned by
people with only elementary school education in that same year). Now all your numbers are
“relative to elementary education”. Report your results in a table.
- b) Plot in the same graph all series constructed in part a).
- c) Which level of education received the highest wages in 1990? How much more did they earn,
compared to workers with elementary school education? How about in 2011?
- d) Which levels of education have experienced the highest increases in wages, compared to
workers with elementary school education, since 1990?
- e) NAFTA was signed in 1994. Do you see any changes in the trends of relative wages before
and after 1994? Explain.
- f) This is a publication about wage and income inequality in the US:
https://inequality.org/facts/income-inequality/ . When the inequality started to be a problem in the US?
- g) Use the data you collected to analyze whether wage inequality in Canada has followed a
similar pattern as in the US. Explain. CECN 707 Economics of International Trade Assignment
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