B. The current spot exchange rate is $1.19/£ and the three-mo...

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B. The current spot exchange rate is $1.19/£ and the three-month forward rate is $1.12/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.18/£ in three months. Assume that you would like to buy or sell £1,000,000.

a) What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? [Mark: 0.75]

b) What would be your speculative profit from the above transaction in dollar terms, if the spot exchange rate in three months turns out to be $1.10/£. [Mark: 0.75]

In 2019 the per head consumption of chicken meat in country X was 40 kg whereas the price per kilo was €2. The price elasticity of demand was -0.8 whereas the price elasticity of supply was 0.6. Given the information provided, and assuming linear demand and supply curves, find:

a) The demand and supply curve equations [Mark:1.0]

b) The effect on market equilibrium price and quantity if the government imposes a tax of €0.7 per kg. Assume that the producers collect the tax on behalf of the government [Mark: 1.0]

c) The effect of the tax imposition on consumer welfare [Mark: 0.5]

In Village A, one farmer, i.e., one unit of labor, can produce either 10 bottles of wine (W) or 2 bottles of olive oil (O). In Village B, one farmer can produce either 25 bottles of wine (W) or 15 bottles of olive oil (O). For now, the two villages are in a state of "autarky" and do not trade with each other or with anyone else. People in Village A consume 100 bottles of (W) and 20 bottles of (O), while people in Village B consume 50 bottles of (W) and no bottles of (O).

a) How much labor is required per bottle of (W) and per bottle of (O) produced in each village? How many farmers does each village have? Explain your answer. [Mark: 0.5]

b) Each village decides to specialize in the good in which it has a comparative advantage. How much is the increase in the aggregate production of each good in the two villages relative to autarky? Note: aggregate production means the sum of the production levels in the two villages. Explain your answer. [Mark: 1.0]

c) The two villages decide to trade freely with each other. Assume that after free trade each bottle of (W) is worth 1.5 bottles of (O). At this price they trade 10 bottles of (W) between them. How many bottles of (W) and of (O) does each village consume? Explain your answer. [Mark: 1.0]

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