1. Consider two countries, the US and Japan, producing steel (A) and cloth (T) with labor and capital, under constant returns to scale. Production functions are identical in both countries, cloth is labor intensive relative to steel, and the US is capital abundant relative to Japan. In the free trade equilibrium, the US exports steel to Japan in exchange for cloth.

a. If a 25% ad valorem tariff rate on US cloth imports causes the relative price of cloth in the US to rise to 5T:1, what is the corresponding relative price of cloth in Japan?

b. Under what circumstances would the US tariff increase the volume of cloth imports from Japan?

c. How does a US tariff affect the well-being of each worker in this country? And in Japan?

d. How would your answer to the question in part c change if all capital in the US is evenly distributed among all workers? (Note: it can be assumed that all tariff revenue is redistributed to US workers.)