Consider two countries, A and Z, which both have many competitive firms that produce a product that is sold in country A. For simplicity, assume that in terms of the cost of production (as measured in Country A's currency) the cost curves (including transportation costs) for firms in Country A are exactly the same as those in Country Z for the product delivered in Country A (that is,when considering a typical Country A firm selling in Country A and a typical Country Z firm also selling in Country A, the cost curves for both are identical).Consider an initial situation in which the economic profits of firms in both countries are zero.For reference, draw the initial equilibrium for this situation, where you show a typical Country-A firm, a typical Country-Z firm, and the market (supply and demand) in Country A.

Country A decides to place a tariff of T on each unit of this product produced by Country Z sold in A.

What are the implications of the imposition of this tariff in terms of the following quantities?

1.Equilibrium quantity and price in the short run (i.e., before any entry or exist occurs).

a.Does the short-run price rise more or less than the tariff?Why?

b.Does the profit of firms in Country A increase or decrease?What happens to the profits of firms in Country Z?

2.Equilibrium quantity and price in the long run (after there is entry or exist of firms)

a.In the long run, does the price rise more or less than the tariff (relative to the initial equilibrium price)?Why?

b.Does the number of firms in Country A increase or decrease?What happens to the number of firms in Country Z?

3.Although the firms in country Z pay the tariff, are the consumers in Country A happier or less happy after the tariff is imposed?Are the people who work for the firms in Country A happier or less happy after the tariff is imposed?