Consider a Heckscher-Ohlin trade model with three countries, A, B, and C, and two products X and Y, all produced in all three countries. Suppose that A and B are each small open economies and C is a large open economy. Suppose that autarky prices in the three countries relative to the free trade price(P*)are as follows, PA< PB< P*< PC, where P=Px/Py.

a) Describe the pattern of trade. (5 points)

b) Suppose that Country A imposes an import tariff on good Y. How would this policy impact the world price? Describe the new pattern of trade. (5 points)

c) Under what circumstances would country A's welfare reduce or improve by forming a free trade agreement with B? Justify your answer. (5 points)

d) Suppose that country C, in a bid to improve its terms of trade imposes an optimal tariff on its imported good. Describe the impact of this policy on C's welfare. How would this policy impact the world price? Justify your answer. (5 points)