Answer:
a)P=2
(b) P*=1
c)Volume of trade(Q) = 20
d) IM(1.75) = XS∗(1.25) = 10
e) 2.5
Step-by-step explanation:
a) Home’s demand curve for wheat is
D = 100 − 20P.
supply curve is
S = 20 + 20P.
Import demand IM(P) = D(P) −S(P) = 80 − 40P.
Absence of trade is equivalent to import demand being zero.
80 − 40P=0
P=2
(b) Foreign demand curve:
D* = 80 − 20P,
Supply curve
S* = 40 + 20P.
Foreign’s export supply curve is given by: Xf:
Xf(P) = S*(P)-D*(P)
Xf(P) =−40 + 40P.
The absence of trade means export supply being zero:
=−40 + 40P=0
P*=1
c) At equilibrium, import demand equal to export supply giving:
80 − 40P = -40+40P
At equilibrium in free trade:
World price(w)=P
Solving for w:
w = 1.5
Volume of trade(Q) = 20
d) The tariff creates a wedge between prices between the two countries, so we now have
P = P*+0.5
Setting export supply equal to import demand, we get:
80 − 40(P* + 0.5) = −40 + 40P*
P *= 1.25
P = 1.75.
At these prices production in each country is given by the following:
The volume of trade is given by:
IM(1.75) = XS∗(1.25) = 10
(e) The home import competing producers are better off after the imposition of tariff because they have less foreign competition due to increased price and quantity of the imports. Home consumers are worse off because of the increase in price. The home government benefits because of the additional tariff revenue generated from tariff. he efficiency loss from tariff is equal to area in Red
= 1/2 * (20 − 10) *0.25 = 1.25
Government revenue area in orange + green:
10 * 0.25+10*0.25 = 5
Gains from Terms of Trade(green)
=10*0.25
=2.5
