Suppose the United States imports 1,000 pounds of bananas from Nicaragua at $0.28 per pound. Due to a 25% tariff, the consumer price in the United States is $0.35 per pound. Farmers in the United States can provide the bananas at a price of $0.40 per pound. Furthermore, suppose that the proposal to eliminate tariffs on the 50 poorest nations passes. As a result, Angola devotes more resources to the production of bananas and can supply the fruit at $0.40 per pound.

a. Does the proposal lead to trade creation or trade diversion? Explain.

b. If the banana tariff were doubled, would there be trade creation or trade diversion?

c. Assuming that the banana tariff is 50%, what is the net effect of the proposal on