Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9. How does the size of the terms-of-trade gain compare with the size of the deadweight loss when (i) the tariff is very small and (ii) the tariff is very large? Use graphs to illustrate your answer.

6.

a. If the foreign export supply is perfectly elastic, what is the optimal tariff Home should apply to increase welfare? Explain.

b. If the foreign export supply is less than perfectly elastic, what is the formula for the optimal tariff Home should apply to increase welfare?

c. What happens to Home’s welfare if it applies a tariff higher than the optimal tariff?

Rank the following in ascending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.

a. Tariff of t in a small country corresponding to the quantity of imports M

b. Tariff of t in a large country corresponding to the same quantity of imports M

c. Tariff of t′ in a large country corresponding to the quantity of imports M′ > M LO.1