Question

Problem IV. Demand and supply curves for two large countries are given by figure 1. Answer the following 1. Consider the autarky situation. (a) Calculate CS, PS, GS, and TS for both countries (3 points) 2. Now, suppo countries open to trade (a) Which country imports and which exports? (0.5 point) (b) Derive import demand for importer and export supply for exporter. You can either drawe both curves with appropriate labeling and placing numbers or write equations. ( points) (e) Find the equilibrium price, trade quantity, and consumption as well as production in each (d) Calculate CS, PS, GS, and TS in both countries. Which country gains? How big are the gaine? SO 540 K SO $10 4000 6000 Country Country Figure 1: Problem IV Now, suppose the importing country government wants to protect domestic products. To do so, it impes specific import tariff equal to $2 pet physical unit of the imported good (a) Find the new equilibrium prices, trade quantity, and consumption as well as production in each coty (2.5 points) (b) Calculate CS, PS, GS, and TS for each country. How big are the gains/loses for each country relative to free trade? How does the world's total welfare change? (5 points) 4. Now, come a case where the importer does not impose any tarif but the exporting country forces specific export tax equal to 82 per pluysical unit of the exported good (a) Find the new equilibrium prices, trade quantity, and consumption as well as production in each c. (2.5 points) (b) Calculate CS, PS, GS, and TS for each country. How big are the gains/loses for each country relative to free trade? How does the world's total welfare change? (5 points) Now suppose the case with both import tariff and export tax each equal to $2 perploysical unit. (a) Find the new equilibrium prices, trade quantity, and consumption as well as production in each coty. (2.5 points) () Calculate CS, PS, GS, and TS for each country. How big are the gins/les for each country relative to free trade? How does the world's total welfare change? (5 points)

Answer 1

(1). For Country A :-   (Autarky situation)

   

Price $50 SS C.S. $40 E P.S. DD $10 6000 Qty. Country A

Therefore, Consumer Surplus (C.S.) = 1/2 x Base x Height = 1/2 x 10 x 6000 = $ 30,000

and, Producer Surplus (P.S.) = 1/2 x Base x Height = 1/2 x 30 x 6000 = $ 90,000

and, Total Surplus (T.S.) = Consumer Surplus + Producer Surplus = $ 120,000

and, Govt. Surplus (G.S.) = $ 0.  

For Country B :- (Autarky situation)

Price SS $40 C.S. $309 P.S. $20 DD 4000 Qty. Country B

Therefore, Consumer Surplus (C.S.) = 1/2 x Base x Height = 1/2 x 10 x 4000 = $ 20,000

and, Producer Surplus (P.S.) = 1/2 x Base x Height = 1/2 x 10 x 4000 = $ 20,000

and, Total Surplus (T.S.) = Consumer Surplus + Producer Surplus = $ 40,000

and, Govt. Surplus (G.S.) = $ 0.