HW2.Woo-Econ 115b

Question 1: Read Jeffrey Sachs, The Age of Sustainable Development, Chapter 4 and answer the following.

  • What are the seven headline items of the poverty checklist?
  • Identify one country that is affected by each of the seven factors; and explain the connection.
  • “Geography is not destiny” – give one example of how each of the common geographical barriers to growth could be overcome. Pick four such common geographical barriers. Question 2: Perform a cost-benefit analysis of the following industrial policy. Assume the demand curve for cars in United States is Q=90-P, and the supply curve of cars is Q=2*P. The following question would require the calculation of consumer surplus (CS), producer surplus (PS), government surplus (GS), and deadweight loss (DWL). Here DWL is the change of social welfare after government adopted a certain policy.
  • Assume U.S. is a closed economy. o (a) Without any government intervention, calculate CS, PS, and GS. o (b) If government imposed a tax of $30 for each car, calculate CS, PS, GS, and DWL. o (c) If government subsidized $30 for each car, calculate CS, PS, GS, and DWL
  • Now assume U.S. is an open economy, and the world price of cars is $0.

o Without government intervention, U.S. could import car at world price. Calculate CS, PS,

and GS in this case.
o (b) If government imposed a tariff of $10, calculate CS, PS, GS, and DWL.
o (c) Given the existence of DWL, what explains the widespread use of import substitution

industrialization (ISI) policies?


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