Question

E-H ONLY. THERE ARE THREE PICTURES

updated figure 2

roblem 2: Trade Policy. demand for cars in Home is q 30 - P and the supply of cars in Home is q -P. The demand for cars in Foreign is q 20-P and the supply of cars in Foreign is q P. a) Calculate the equilibrium price and quantity in each country under isolation. 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. The 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 $1 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. 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? sis for Home. gure L Wellare D H S H P.w.t +t PLw P.wt CDE Figure 2 Welfare Analysis for Foreign. S F P.w B CD E D F Table 1. Note: You don't necessarily need to use all the letters in the graphs. Home Foreign |FreeTrade |Tariff Free Trade Tariff CS PS Gov. Rev TS Figure 2. Welfare Analysis for Foreign. S.F P w D F Note: P w is the world price under free trade. P-w.t is the world price whe place. P.wt+t is the world price when the tariff is in place plus the value of MacBook Pro

Answer 1

1)

In isolation,

at Home, equating demand and supply will lead to :

P=30-P

P=15 and q=15

At foreign,

equating demand and supply will lead to :

P=20-P

P=10 and q=10

2)

Home country will be the importer of the car since it produces a car at a much higher price. The foreign country will be the exporter.

3)

Home's import demand function= demand - supply

= 30 - P - P

=30 - 2P

Foreign's export supply will be:

=supply - demand

= P- 20+P

=2P -20

4)

When Free trade is allowed:

Home's Import demand = Foreign's Export supply

30-2P = 2P-20

P=12.5

The number of cars traded between the two countries is 5 cars.