Question

Suppose that the constant marginal cost of producing an automobile is $24,000 in Germany, $16,000 in the United States, and $22,000 in Japan. a. Under free trade, would Germany produce its own cars or import them? If it imports, from which country will it import them? Explain. b. If the German government imposes a 100% tariff on all auto imports, would it produce its own automobiles or import them? If it imports, from which country will it import them? Explain. c. Germany has a tariff of 100% on imported autos. Then Germany decides to join a customs union with the United States. What is a customs union? d. After forming the customs union, what will the domestic price of automobiles be in Germany? Explain. e. If Germany decides to join this customs union with the United States, will there be trade creation, trade diversion, or both? Explain.

Answer 1

1it will import only since foreign prices are lower at each level of output. It will import from USA since USA cars are cheaper

2 it will produce all domestic ally since now domestic prices are lower at 24000 instead of 32000 of USA and 44000 of japan

3 A custom is union of countries which allows no tariffs or other barriers on trade among members and in addition harmonizes trade policies towards rest of world

4 The domestic price will be 16000. I. E the price of USA imports. This is because after customs union is formed, Germany reduces tariff on USA imports.

5 There is only trade creation since lower costs country USA displaces higher cost country Japan