30 Apr Question: Trade policy. The demand for high-end Workstations in the United States is given by QD = 100 − P …
Trade policy. The demand for high-end Workstations in the United States is given by QD = 100 − P , where QD is the quantity demanded expressed in thousands of units, and P is the price measured in thousands of dollars. The supply is given instead by QS = P. For this exercise we will assume that the US are a small country in the world’s Workstations market and that the prevailing world price is given by P W = 32.
(a) How many Workstations are produced domestically under free trade? How many are imported? What is the price prevailing in the domestic market?
(b) The US government has decided to limit international competition, set- ting the maximum number of imported Workstations equal to 20 (thousand) units. How many workstations are sold in equilibrium in the US? How many workstations are imported? How many are manufactured in the US?
(c) Compute the tariff equivalent to the quota, or in other words, the tariff that induces imports equal to 20 (thousand) units. Compute the ad- valorem tariff, i.e. the tariff as a percentage of the prevailing world price.
(d) Assume now that the domestic producers of Workstations use only one intermediate input, that must be imported. In free trade, the value added by the domestic Workstations producers is 12. Assume now that the government is maintaining the tariff on Workstations you have determined in part (c). What would be the effective rate of protection granted to Workstations if the US government imposes a 25% tariff on the imports of the intermediate good? What if it imposes a 50% tariff on such imports?
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