Suppose that Nation 1 can import good X from Nation 2 at a price P1=1.20. If the domestic demand and supply curves are given by the following equations: Demand: P=80-2Q Supply: P=5+3Q a) Easy: Under free trade, how many units of good X are consumed? How many units of good X are produced domestically? How many units of good X are imported? b) Easy: If a 30% import tariff is imposed, how many units of good X are consumed? How many units of good X are produced domestically? How many units of good X are imported? c) Medium: Perform a detailed welfare analysis of the tariff.
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Step 1: To find the equilibrium quantity of good X consumed under free trade, we need to set the demand equal to the supply: Show more…
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We have to answer the following exercise for our module dealing with Tariff and non-tariff measures: The domestic demand for good X is Dd = 100 - 20P. The domestic supply of good X is Sd = 20 + 20P. a) Draw the domestic demand and supply curves for good X. Mention how you would relate this partial equilibrium model to a general equilibrium model. b) If the country allows no trade in good X, what are the equilibrium price, quantity produced, and quantity consumed? Can you relate the price of X to the price of other products (as a numeraire) in a general equilibrium framework? c) Imports of good X are available in the world market at PX = 1. Draw the total supply curve. If the country allows free trade in good X, what are the equilibrium price, quantity produced domestically, quantity consumed domestically, and quantity imported? d) If the country imposes a specific tariff of t = 0.5 per unit of imported X, what are the equilibrium price, quantity produced domestically, quantity consumed domestically, and quantity imported? e) Who gains and who loses from the tariff? Does national welfare rise or fall?
Manasvee S.
Consider a country that produces 2 units of X and 2 units of Y in autarky and under free trade. The international prices are as follows: Px is 2 and Py is 1. Let utility function of this country: U(X, Y) = XY. a. What is GDP of this country in respect of international trade? Furthermore what is the budget constraint under free trade? b. Calculate utility level under autarky (i.e., closed economy). c. Calculate optimal amount of X and Y under free trade. d. Which good is exported by this country? And what is the amount of export?
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