Consider the case of a Foreign monopoly with no Home production, shown in Figure 9-7. Starting from free trade at point A, consider a $5 tariff applied by the Home government.

a. If the demand curve is linear, as in Problem 7, what is the shape of the marginal revenue curve?

b. How much does the tariff-inclusive Home price increase because of the tariff, and how much does the net-of-tariff price received by the Foreign firm fall?

c. Discuss the welfare effects of implementing the tariff. Use a graph to illustrate under what conditions, if any, there is an increase in Home welfare.

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Price Increase in P is less than t, the increase in MC P3= P₂-t Increase in MC due to tariff, t e C B X2 X1 A MR D t •MC* + t MC* Foreign exports Feenstra/Taylor, International Trade, 5e Ⓒ 2021 Worth Publishers