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3. Assume that the world consists of three countries, A, B, and C. Country A is considering forming a free trade area in good X with Country B. Country C has no intention of joining. All three countries are small buyers in the market for good X, and the market is perfectly competitive. Country A's domestic demand and supply curves are illustrated below: Price of X Initial Country A Price (with $3 tariff) $7 Partner country Price (B) Pw = $5 Outside-world Price (C) 10 15 22 Country A's Imports a. Assume that Country A currently imposes a tariff of $3 per unit on all imports of good X. Assuming that the cost of producing each unit of good X is $7 in Country B and $5 in Country C, what is the amount of Country A's imports of X (and the country from which they will come), and the domestic price of good X. b. If Country A were to form a free trade area with Country B only, state the effects on Country A's imports (and the country from which they will come), and the domestic price of good X. Indicate the areas of the graph that illustrate trade creation and trade diversion. Finally, assess whether the free trade area in good X is beneficial to Country A by calculating the areas to show the welfare effect from trade creation and trade diversion, and find the net benefit. c. Is there a trading arrangement other than a free trade area with Country B under which Country A would be better off? Calculate the net welfare effect of this for Country A and explain fully.

3. Assume that the world consists of three countries, A, B, and C. Country A is considering forming a free trade area in good X with Country B. Country C has no intention of joining. All three countries are small buyers in the market for good X, and the market is perfectly competitive. Country A's domestic demand and supply curves are illustrated below:

Price of X
Initial Country A Price (with $3 tariff)
$7 Partner country Price (B)
Pw = $5 Outside-world Price (C)
10 15 22
Country A's Imports

a. Assume that Country A currently imposes a tariff of $3 per unit on all imports of good X. Assuming that the cost of producing each unit of good X is $7 in Country B and $5 in Country C, what is the amount of Country A's imports of X (and the country from which they will come), and the domestic price of good X.

b. If Country A were to form a free trade area with Country B only, state the effects on Country A's imports (and the country from which they will come), and the domestic price of good X. Indicate the areas of the graph that illustrate trade creation and trade diversion. Finally, assess whether the free trade area in good X is beneficial to Country A by calculating the areas to show the welfare effect from trade creation and trade diversion, and find the net benefit.

c. Is there a trading arrangement other than a free trade area with Country B under which Country A would be better off? Calculate the net welfare effect of this for Country A and explain fully.

3. Assume that the world consists of three countries, A, B, and C. Country A is considering forming a free trade area in good X with Country B. Country C has no intention of joining. All three countries are small buyers in the market for good X, and the market is perfectly competitive. Country A's domestic demand and supply curves are illustrated below:

Price of X
Initial Country A Price (with 3 tariff)7 Partner country Price (B)
Pw = 5 Outside-world Price (C)
10 15 22
Country A's Imports

a. Assume that Country A currently imposes a tariff of3 per unit on all imports of good X. Assuming that the cost of producing each unit of good X is 7 in Country B and5 in Country C, what is the amount of Country A's imports of X (and the country from which they will come), and the domestic price of good X.

b. If Country A were to form a free trade area with Country B only, state the effects on Country A's imports (and the country from which they will come), and the domestic price of good X. Indicate the areas of the graph that illustrate trade creation and trade diversion. Finally, assess whether the free trade area in good X is beneficial to Country A by calculating the areas to show the welfare effect from trade creation and trade diversion, and find the net benefit.

c. Is there a trading arrangement other than a free trade area with Country B under which Country A would be better off? Calculate the net welfare effect of this for Country A and explain fully.

Added by Craig S.

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