Question

2. Given the supply and demand equations for two countries, home and foreign, below,

Home Foreign
Qd = 100 – 3P Qd = 80 – 4P

Qs = 10 + 4P Qs = 30 + 2P
a. List the key assumptions of the tariff model.

b. Find equilibrium price and quantity in each country before trade. Show your work.

c. Which country will be the exporter? __________ Which country will be the importer? _____________

d. What is the equilibrium world price and quantity traded, once the countries begin to trade with each other? Show your work.

e. Show the effect of a tariff = $.50 levied by the importing country. What is the new equilibrium world price and quantity traded? Show your work.

f. Sketch the supply and demand for the importing country and identify and label the gains and losses due to the tariff in the importing country.

Answer 1