Trade Policy.
The demand for cars in Home is q = 30 â P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 â P and the supply of cars in Foreign is q = P.
a) Calculate the autarky equilibrium price and quantity in each country.
b) Who is the importer of cars and who is the exporter?
c) Write the import demand for Home and the export supply for Foreign.
d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?
e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.
f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.
g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.
h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?
Trade Policy.
The demand for cars in Home is q = 30 â P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 â P and the supply of cars in Foreign is q = P.
a) Calculate the autarky equilibrium price and quantity in each country.
b) Who is the importer of cars and who is the exporter?
c) Write the import demand for Home and the export supply for Foreign.
d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?
e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.
f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.
g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.
h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?
Related textbook solutions
Related questions
Draw the graph carefully. Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.
Consider the following data on the factor endowments of two countries A and B:
|
Countries |
||
|
Factor Endowments |
A |
B |
|
Labor force: L |
100 workers |
50 workers |
|
Capital Stock: K |
60 machines |
10 machines |
a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).
b. Supposing that cars are capital intensive relative to shoes, which country will have a comparative advantage in the production of cars? Of shoes? Explain.
c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.
d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.
