GLOBE

Trade Problem Set 90 3-1


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1. Suppose the domestic supply and demand curves for running shoes in the U.S. are,

S = 10P - 300
D = 3000 - 20P

Let the free trade price be $50.

A. What is the equilibrium quantity of imports.

Suppose a specific tariff of $10 per pair of shoes is imposed. Assume that the U.S. is a "small" country.

B. Depict the price effects of the tariff graphically on a US supply and demand diagram.

C. Calculate the domestic welfare effects.

D. What import quota could be levied to generate the same price effects? Explain how the welfare effects of the quota may differ from the tariff.

E. Suppose instead that a voluntary export restraint is negotiated and set at the same quantity as in part (d) above. Calculate the welfare effects of the VER. How does it differ from the import quota and the tariff?

F. Give two reasons why VERs may be implemented rather than import quotas or tariffs. Explain.


2. Suppose the supply and demand curves for wheat in Mexico are,

Sw = 10 + 20Pw     and
Dw = 100 - 10Pw

while the supply and demand curves in the U.S. are,

Sw* = 40 + 20Pw    and
Dw* = 80 - 20Pw

Note that Mexico is a "large" country in this example.

A. Graph the import demand curve for Mexico and the export supply curve for the U.S. on the same diagram.

B. What price would prevail in each country in autarky?

C. Calculate the equilibrium free-trade price and the quantity traded ? Show your work.

Suppose a specific tariff of $0.50 is levied by Mexico on the import of wheat from the U.S..

D. Calculate the new price that would prevail in each country after the tariff is imposed. Explain.


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