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04_ProblemSet_4

The document outlines Problem Set 4 for an Introduction to International Economics course, focusing on trade policy instruments related to cheese. It includes calculations for autarky equilibrium, effects of free trade, and the impact of a specific tariff on price, quantity, and welfare for both Home and Foreign countries. Additionally, it examines the implications of a larger Foreign country on trade dynamics and welfare outcomes when tariffs are imposed.

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4 views1 page

04_ProblemSet_4

The document outlines Problem Set 4 for an Introduction to International Economics course, focusing on trade policy instruments related to cheese. It includes calculations for autarky equilibrium, effects of free trade, and the impact of a specific tariff on price, quantity, and welfare for both Home and Foreign countries. Additionally, it examines the implications of a larger Foreign country on trade dynamics and welfare outcomes when tariffs are imposed.

Uploaded by

isayevanezrin1
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Dr.

Alexandra Seidel
Introduction to International Economics

Problem Set 4

The Instruments of Trade Policy

1. Home and Foreign demand for cheese is given by

Home 𝐷(𝑃) = 100 − 20 × 𝑃


Foreign 𝐷 ∗ (𝑃) = 80 − 20 × 𝑃

Domestic and foreign producers supply goods according to

Home 𝑆(𝑃) = 20 + 20 × 𝑃
Foreign 𝑆 ∗ (𝑃) = 40 + 20 × 𝑃

(a) Determine the autarky equilibrium and calculate domestic price for each country.
(b) Suppose now that both countries open up to free trade. Will Home import or export
cheese? Derive and graph its import demand or export supply curve. Derive and
graph an appropriate curve for Foreign.
(c) Calculate and depict the world price of cheese when both countries trade with
each other at zero cost and find the traded quantities.

2. Suppose Home imposes a specific tariff τ = 0.5 per pound of cheese imported.

(a) Determine and graph the effects of the tariff on the price of cheese, the quantity
demanded and supplied, and the volume of trade.
(b) Determine the effect of the tariff on the welfare of Home import-competing pro-
ducers, Home consumers, and Home government.
(c) Show graphically and calculate the terms of trade gain, the efficiency loss, and the
total effect on welfare resulting from the tariff.

3. Suppose Foreign is now a much larger country. Its demand and supply are given by
𝐷 ∗ (𝑃) = 800 − 200 × 𝑃 and 𝑆 ∗ (𝑃) = 400 + 200 × 𝑃

Suppose Home imposes a specific tariff τ = 0.5 per pound of cheese imported.
(a) Determine the effects of the tariff on the price of cheese, the quantity demanded
and supplied, and the volume of trade.
(b) Calculate the terms of trade gain, the efficiency loss, and the total effect on wel-
fare resulting from the tariff.
(c) How does the size of the tariff imposing country influence the results?

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