Consider two countries, home and foreign and a single good, Y. Assume that home country imports good Y from foreign country. The import demand curve for good Y in home country is given by: MD = 170 – 2PY and the export supply curve for good Y in Foreign country is given by: EX = PY – 40. Part A. What is the free trade price of good Y? Show your work. Part B. How many units of good Y are traded under free trade? Show your work. Part C. If home country imposes a specific tariff of $15 per unit of good Y imported, what is the price of good Y that Foreign exporters receive? Show your work.
Consider two countries, home and foreign and a single good, Y. Assume that home country imports good Y from
foreign country. The import demand curve for good Y in home country is given by: MD = 170 – 2PY and the
export supply curve for good Y in Foreign country is given by: EX = PY – 40.
Part A. What is the free trade price of good Y? Show your work.
Part B. How many units of good Y are traded under free trade? Show your work.
Part C. If home country imposes a specific tariff of $15 per unit of good Y imported, what is the price of good
Y that Foreign exporters receive? Show your work.
Part D. If home country imposes a specific tariff of $15 per unit of good Y imported, what is the price of good
Y that Home consumers pay? Show your work.
Part E. If home country imposes a specific tariff of $15 per unit of good Y imported, how many units of good
Y are traded now? Show your work.
Part F. If home country imposes a specific tariff of $15 per unit of good Y imported, what is the tariff
revenue? Show your work.
Part G. Assume that instead of a specific tariff, an import quota will be used on good Y. What is the amount
of the quota that will have identical effects (in terms of amount of good Y imports and the domestic
price of good Y) as the specific tariff of $15? Explain your reasoning.
Part H. Consider the use of import tariff vs. import quota in Home country that will result in the same amount
of good Y imports and the domestic price of good Y. If quota rents are given to Foreign country,
which policy, i.e., import tariff vs. import quota, is preferable by Home country on the basis of its
effect on social welfare? Explain your reasoning.
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Part F. If home country imposes a specific tariff of $15 per unit of good Y imported, what is the tariff revenue? Show your work.
Part G. Assume that instead of a specific tariff, an import quota will be used on good Y. What is the amount of the quota that will have identical effects (in terms of amount of good Y imports and the domestic price of good Y) as the specific tariff of $15? Explain your reasoning.
Part H. Consider the use of import tariff vs. import quota in Home country that will result in the same amount of good Y imports and the domestic price of good Y. If quota rents are given to Foreign country, which policy, i.e., import tariff vs. import quota, is preferable by Home country on the basis of its effect on social welfare? Explain your reasoning.
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