Zamen is a small country located in the midst of the Atlantic Ocean. It is completely isolated: no one goes there, no one leaves. One half of Zamen’s working age population is unemployed. President Obama decides to give Zamen a billion dollars for the purpose of creating a labor intensive sweater manufacturing industry. It is agreed that Zamen will export 10 million sweaters a year to the US, which is 10 percent of the US market. Zamen’s production will always stay fixed at exactly 10 million sweaters. The sweater industry in the U.S. is perfectly competitive and exhibits constant costs.
a. What are the short run effects of Zamen’s sweater export on the individual behavior of US companies? In short run equilibrium, what is the change in US aggregate supply? How much of the short run aggregate supply is provided by Zamen?
b. What are the long run effects of Zamen’s sweater export on equilibrium price, firm output, the number of US firms in the sweater industry and on the final share of the US sweater market that is domestically supplied?
c. The Garment Workers Union decides to support a Republican candidate in the next presidential election. Why?
d. Zamen was hoping that the US sweater industry exhibited decreasing costs, rather than constant costs. Show why this would have benefited Zamen in the long run