Question

The world consists of two countries: Home and Foreign. We observe supply and demand curves in...

The world consists of two countries: Home and Foreign. We observe supply and demand curves in both countries:

D= 50?25P and S=25P in Home
D* = 200?25P* and S* = 25P?50 in Foreign

a) Derive MD (import demand) and XS (export supply) curves.

b) Graph MD and XS. Find the world equilibrium (price and quantity) under free trade.

c) Suppose that importer imposes a tariff t = 2. Find the new prices in Home and Foreign. How will the volume of trade change?

d) Consider the importer country. Calculate the welfare effects from the tariff for consumers, producers, and government. Calculate efficiency losses and the terms of trade gains. What is the overall welfare effect?

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