05 Jun Question ECON370 Fall 2014 International Trade Kan Yue
Question
ECON370 Fall 2014 International Trade Kan Yue
Homework 5
Due on Dec 8th
Tariff in a small country (13 points)
Use the following table that describes the Home market for melons to answer the following questions. Note that you will finish both questions by graphing your results and it may be helpful to draw the graphs as you answer the earlier parts of the questions.
Price
Domestic (Home)
Domestic (Home)
Foreign export
quantity demanded
quantity supplied
supply
$1
120
0
0
$2
105
5
20
$3
90
10
40
$4
75
15
60
$5
60
20
80
$6
45
25
100
$7
30
30
120
$8
15
35
140
$9
0
40
160
a) Find the no-trade equilibrium price and quantity. (2pts)
b) Now, suppose Home engages in trade for melons and the world price is $4 and Home is a small country. What is the trade balance (value of net imports or exports)? Calculate the consumer surplus and the producer surplus in the market with trade. (3pts)
c) Now suppose Home is a small country and Home places a $2 tariff on each imported melon. Calculate the value of consumer surplus and producer surplus with the tariff. What is the value (if any) of the consumption loss? What is the value (if any) of the production loss? (4pts)
d) Graph supply and demand for the Home market. Remember to put quantity on the x-axis and
price on the y-axis. Indicate on this “Small Home Market” graph the world price (PW), the world price plus the tariff (PW+t), the government revenue from the tariff (e), the producer surplus with the tariff (PS), the consumer surplus with the tariff (CS), and the consumption loss (d) and production loss (b) as a result of the tariff. (4pts)
ECON370 Fall 2014 International Trade Kan Yue
Tariff in a large country (7 points)
Consider a large country applying a tariff, t, to imports of a good.
a) How does the export supply curve compare with that in the small country case? Explain why these are different. (3pts)
b) Explain how the tariff affects the price paid by consumers in the importing country, and the price received by producers in the exporting country and how these prices are affected if (i) the export supply curve is more elastic, or (ii) the export supply curve is more inelastic. (4pts)
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