Home is a “small country” in this market. PDand PW are prices domestically

QUESTION

Home is a “small country” in this market. PDand PW are prices domestically (that is, in autarky) and worldwide, respectively.Given that the demand and supply curves are linear, what are the values of the price at the intercepts A and F? [Hint: There is enough information on this graph to figure these values out, and the values are important to do the calculations below. Once you figure these out it might not be a bad idea to write down the equations of the curves in slope-intercept form. NOTE: F will be a negative number!!! It’s weird, but don’t worry about it. Proceed with the rest of the problem as usual.]With trade, what is the quantity of imports?What is the consumer surplus to H in autarky? What is CS with trade?What is the producer surplus to H in autarky? What is PS with trade?What are the gains from trade to H?Advanced
International Trade Theory and Policy
Problem
Set 5
100
points total

(40
points) Refer to the graph below to answer the following questions.

Home’s
Import-Competing Industry
Note:
All curves are linear.

.png”>

Home is a “small
country” in this market. PDand PW are prices
domestically (that is, in autarky) and worldwide, respectively.

Given
that the demand and supply curves are linear, what are the values of the
price at the intercepts A and F?
[Hint: There is enough information on this graph to figure these
values out, and the values are important to do the calculations
below. Once you figure these out it
might not be a bad idea to write down the equations of the curves in
slope-intercept form. NOTE: F will
be a negative number!!! It’s weird,
but don’t worry about it. Proceed
with the rest of the problem as usual.]
With
trade, what is the quantity of imports?
What
is the consumer surplus to H in autarky?
What is CS with trade?
What
is the producer surplus to H in autarky?
What is PS with trade?
What
are the gains from trade to H?

Now suppose H imposes a tariff of 20% on
imports of this good.

What
is the quantity demanded after the tariff?
What is the Consumer Surplus?
How
much is domestically supplied after the tariff? What is the Producer Surplus?
What
is the tariff revenue?
How
large is the deadweight loss from the tariff?

2.
(40
points) Suppose a “large country”H has an excess demand curve for good X given
by P=70-2X. The worldwide excess supply
curve for good X is P=10+X.

a.
Graph
the curves.
b.
What
is the free trade equilibrium quantity and price when there is no tariff? Mark the equilibriumon your graph as point A.
c.
What
is consumer surplus when there is no tariff?
d.
A
tariff of 20% is imposed on imports of good X.
Mark the new equilibrium on the graph as point B. Calculate the equilibrium quantity, consumer price
and producer price after the tariff.
(Hint: We can analyze this by “shifting” the supply curve to P=1.20*(10+X). It is OK to get fractions of units.)
e.
What
is the consumer surplus with the 20% tariff?
What is the tariff revenue?
[Hint: Start with the producer price you got in c. Multiply by .05 to get the tax per unit. Multiply by the number of units to get the revenue.] Add these together to get total welfare for
the home country. Has welfare gone up
for H due to the tariff?
f.
Now
suppose the tariff is 100%. As in part
d, mark the new equilibrium on the graph as point C. Calculate the equilibrium quantity, consumer
price and producer price after the tariff.
g.
What
is the consumer surplus with the 100% tariff?
What is the tariff revenue? Add these together to get total welfare for
the home country. Has welfare gone up
for H due to the tariff?
h.
At
point A, what is the price elasticity of supply?
i.
Given
your answer for h, what is the “optimal” tax rate? That is, apply the inverse elasticity rule
from the end of lesson 9 to the original equilibrium. [Technical note. Applying the inverse elasticity rule as I
want you to do here with the original equilibrium will get us close to the
“optimal.” But it is not exact. The inverse elasticity technically is the
optimal rate to charge at the optimal
post-tax equilibrium!! But actually
solving for what that is non-trivial (remember, the elasticity of supply is changing
along the supply curve). In this
problem, it is .60, but that should not be your solution to this question.]
j.
Calculate
the consumer surplus, tariff revenue and total surplus to H at the tax rate you
calculated in i.

3. (20
points) Refer to the following graph for the Home country
before and after a tariff. The home
producer of the good is a monopolist prior to trade.
.png”>
a. Under free trade (prior to
the tariff), the home country produces ________ and imports ________.

b. The consumer surplus prior to
the tariff is:

c. According to the graph, the
home country imposed a tariff of _____ dollars per unit, and the new quantity
of imports is _____.

d. After the tariff, what is the
decrease in consumer surplus?

e. After the imposition of the
tariff, the home monopolist saw an increase in production of ______ and the
producer surplus increased by ________.

f. The home government collects
______ in tariff revenue.

g. The deadweight loss due to the tariff is:

ANSWER:

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