Trade Policy. The demand for cars in Home is q = 30 – P and the supply of cars i

Question

Trade Policy.

The demand for cars in Home is q = 30 – P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 – P and the supply of cars in Foreign is q = P.

a) Calculate the autarky equilibrium price and quantity in each country.

b) Who is the importer of cars and who is the exporter?

c) Write the import demand for Home and the export supply for Foreign.

d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?

e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.

f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?

Explanation / Answer

a) Autarky condition in a particular commodity market refers to a situation in which a country does not engage in any trade in that commodity with other countries. Consequently all the transactions take place within the domestic market under a closed economy. The autarky equilibrium price is determined when the total domestic supply of the commodity is equal to the total domestic demand.

so for home country

Qd=30-p

Qs=p

hence equilibrium will be wen Qd=Qs

30-p=p

30=p+p

30=2p

30/2=p

p=15

putting the value p=15 in Qd equation we will get

Qd=30-p (p=15)

Qd=30-15=15

so in home country quantity is 15 and price is 15

Now in foreign country

Qd=10-p

Qs=p

eqilibrium at Qd=Qs

10-p=p

10=p+p

10=2p

p=10/2

p=5

putting value of p in Qd of foriegn country we ll get

Qd=10-p (p=5)

Qd=10-5=5

Hence in foreign country Quantuty is 5 and price is 5

b) Home country is the importer of the cars because the price of car is greater in home country and demand is also high.

Foreign country is the exporter of cars because the price of the car is much lesser than the home country.

c) When the price of the two countries become equal till that point the trading between two countries will take place . so when price in both the countries become 10 the trade will tae place .

Hence the imported country i.e home country will have quantity demand will be 20.

Qd=30-10=20 (p=10)

And export supply of foreign is Qs=p and p=10 therefore quanttity supply is 10.

d) World Demand of cars will be the summation of total quantity demanded of each country.

Hence world quantity demand is

WQd=30-p+10-p

WQd=40-2p

similarly summation of total quantity supply of each will get world quantity supply

Hence world quantity supply is

WQs=p+p

WQs=2p

In free trade equilibruin will be formed where WQd=WQs

WQd=WQs

40-2p=2p

40=2p+2p

40=4p

p=40/4=10

So world price is 10

Now put p=10 in WQd we will get quantity

WQd=40-2p

WQd=40-2(10)

WQd=40-20=20

Hence world quantity is 20 and price is 10

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.