2. P ($) The diagram on the right represents the market for T-shirts in Country X, a small country. Assume that the world price of a T-shirt is $12. 21 20 19 18 a. 17 16 15 14 13 12 00 8 10 12 14 16 18 20 13 15 17 19 21 22 24 26 23 25 9 11 (M) MEB ($) Redraw the supply and demand diagram for the domestic market under free trade. Label the relevant prices and quantities, i.e., the domestic price, production, and consumption The T-shirt industry is a powerful lobby in Country X. The industry lobbying group, The T-Shirt Institute, commissions a study from a group of mercenary academic economists. The study argues that there are positive external benefits from T-shirt 911 production and advocates a tariff to increase domestic T-shirt production. Their estimate of the marginal external benefit (MEB) to Country X from producing a T- shirt at each level of T-shirt production is given in the lower panel of the diagram. For now, let's assume these figures are correct. 7 6 5 4 3 2 1 MEB 0 8 10 12 14 16 18 20 13 15 17 19 21 22 24 26 23 25 Q (M) 9 c. b. If Country X's parliament approved a tariff of $4 per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) If instead of the tariff, Country X's parliament approved a $4 production subsidy per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) Suppose that the Parliamentary Research Service, a research arm of parliament, debunks The T-Shirt Institute study and finds that the marginal external benefit of T-shirt production is $0 at all levels of output. Let's use this information to reevaluate the welfare effects of the two policies considered above. d. If Country Xs parliament approved a tariff of $4 per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) If instead of the tariff, Country X's parliament approved a $4 production subsidy per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) e. 2. P ($) The diagram on the right represents the market for T-shirts in Country X, a small country. Assume that the world price of a T-shirt is $12. 21 20 19 18 a. 17 16 15 14 13 12 00 8 10 12 14 16 18 20 13 15 17 19 21 22 24 26 23 25 9 11 (M) MEB ($) Redraw the supply and demand diagram for the domestic market under free trade. Label the relevant prices and quantities, i.e., the domestic price, production, and consumption The T-shirt industry is a powerful lobby in Country X. The industry lobbying group, The T-Shirt Institute, commissions a study from a group of mercenary academic economists. The study argues that there are positive external benefits from T-shirt 911 production and advocates a tariff to increase domestic T-shirt production. Their estimate of the marginal external benefit (MEB) to Country X from producing a T- shirt at each level of T-shirt production is given in the lower panel of the diagram. For now, let's assume these figures are correct. 7 6 5 4 3 2 1 MEB 0 8 10 12 14 16 18 20 13 15 17 19 21 22 24 26 23 25 Q (M) 9 c. b. If Country X's parliament approved a tariff of $4 per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) If instead of the tariff, Country X's parliament approved a $4 production subsidy per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) Suppose that the Parliamentary Research Service, a research arm of parliament, debunks The T-Shirt Institute study and finds that the marginal external benefit of T-shirt production is $0 at all levels of output. Let's use this information to reevaluate the welfare effects of the two policies considered above. d. If Country Xs parliament approved a tariff of $4 per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) If instead of the tariff, Country X's parliament approved a $4 production subsidy per T-shirt, would this increase Country X's welfare? What is the change in welfare? (Give a $ figure.) e
