US consumers always buy the lowest-priced shirts and the US has a $10 tariff on
ID: 1111937 • Letter: U
Question
US consumers always buy the lowest-priced shirts and the US has a $10 tariff on shirt imports (we're looking at the US as the market/as the importer). Then, the US and Mexico form a Free Trade Area which does not include Thailand. For all the following, tell if trade diversion, trade creation, both, or neither occur. Explain your answers to A and B (no need to explain C) A. It costs $50 to produce shirts in the US, S18 in Mexico, and $20 in Thailand B. It costs $50 to produce shirts in the US, S35 in Mexico, and S20 in Thailand C. It costs $50 to produce shirts in the US, S25 in Mexico, and $20 in Thailand Thinking of the specificity rule, if the US wanted to decrease consumption of sugar (for health reasons), which of the following policies would be best: tariff, consumption tax, production subsidy? Please explain your answer, being sure to mention the problem or side-effect that occurs with the policies you did not choose. Still with the specificity rule, but in a different problem, the UK wants to increase employment in the steel industry (perhaps for employment reasons). Which of the policies would be best: tariff, consumption tax, production subsidy? Please explain, mentioning the problem or side-effect of the policies you did not choose. 2A. C.Again with the specificity rule, suppose Japan wanted to reduce imports of food (to become more self-reliant or independent in this sector. Which policy would be best: tariff, consumption tax, production subsidy? (no need to explain)Explanation / Answer
1A) trade creation because US will import from Mexico and Mexico is the cost minimising country. Thus trade is created.
B)still trade is created because US will import from Thailand and Thailand is also efficient from cost point of view.
C)trade diversion because US will import from Mexico but Mexico is not cost efficient because if US imports from Thailand then because of $10 tariff Cost of import from thailand increases to 30. Thus trade Diversion
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