Suppose Home is a small country. Use the graphs below to answer the questions. Quantity Price

(a) Home Market 9 8 6 4 $14 S D 2 4 5 6 8 Price X* X* + t

(b) Import Market M 2 6 Import $8 6

a. Calculate Home consumer surplus and producer surplus in the absence of trade.

b. Now suppose that Home engages in trade and faces the world price, P* = $6. Determine the consumer and producer surplus under free trade. Does Home benefit from trade? Explain.

c. Concerned about the welfare of the local producers, the Home government imposes a tariff in the amount of $2 (i.e., t = $2). Determine the net effect of the tariff on the Home economy. 276 Part 4 n International Trade Policies