Canada and the US trade apples.The Canadian domestic demand (QdC ) and supply curves (QsC) are:

???????? ???? = 850 10????1

???????? ???? = 20 + 35????1

The US domestic demand (QdU ) and supply curves (QsU) are:

???????? ???? = 150 5????2

???????? ???? = 35 + 20????2

a.Assume that there is no trade allowed. What are the equilibrium autarky prices and quantities of apples in Canada and the US?Which country is likely to export and which will import.Explain why.

b.Now liberalize trade and assume that there are no wedges between prices in Canada and the US (i.e. ????1 = ????2).What are the equilibrium prices, quantities produced, consumed, and traded in each country?Draw a three-panel diagram.

Canada: 850-10P-(-20+35P) 870-45P

US: 35 + 20????- (150 5????) -185+25P

Import=Export870-45P=-185+25PP=1055/70=15.07

c.Calculate the effects on consumer and producer surplus in each country and compare the impacts between autarky and liberalized trade.

d.Suppose there is a transportation cost of $5 per unit.Calculate the new equilibrium prices, quantities consumed, produced and traded.

e.Introduce a 20% ad valorem tariff in Canada.Calculate the new equilibrium prices, quantities consumed, produced and traded.

f.Introduce a $7 per unit export subsidy in the US.Calculate the new equilibrium prices, quantities consumed, produced and traded.

g.Introduce a $5 per unit producer subsidy in the US.Calculate the new equilibrium prices, quantities consumed, produced and traded.

h.Introduce a $5 per unit consumer subsidy in the Canada.Calculate the new equilibrium prices, quantities consumed, produced and traded.

i.In all the questions above we assumed that both countries had the same currency. Now suppose that the Canadian currently appreciates by 20%.(Hint: P1=0.8*P2). Calculate the new equilibrium prices, quantities consumed, produced and traded.