Explain in details...

Problem Set 6 Tariffs 1. The graph below shows domestic supply and demand for a good in a small country. Suppose that it faces a world price of the good of $4 per pound. Show the effects on this market of a 25% ad valorem tariff on the good by drawing the equilibria with and without the tariff, then using the grid lines in the figure to calculate the changes in quantities supplied, demanded, and imported, and the welfare effects of the tariff on suppliers, demanders, government, and the country as a whole. p (S/ pound) 10 S O-NWAND DO 1 2 3 5 6 7 8 9 10 q (pounds) 2. Use the partial equilibrium, small-country model of a tariff to work out the effects of an increase in a tariff that was already positive. For each case below, find the effects on domestic price, domestic quantities supplied and demanded, quantity of imports, and the welfare of suppliers, demanders, government, and the country as a whole. Also note, by comparing with your notes from class, whether any of these results differ from the effects of a positive tariff starting from a zero tariff. a. A tariff increase that is small enough so that the quantity of imports remains positive. b. A tariff increase that is large enough to reduce the quantity of imports to zero.3. Suppose that, in a partial equilibrium model, a country's autarky price is $10, while its price with free trade is $8. What will be the domestic price if the country levies a specific tariff of $3 and the country is a. Small? b. Large? 4. In the partial equilibrium, large-country model, show how the import supply curve can be derived as the excess supply in the Foreign country's domestic market. Then use this to show how a tariff levied by the Home country affects prices, quantities, and welfare (of Foreign suppliers, demanders, and government) in the Foreign economy. 5. Using the partial equilibrium model of a large importing country, suppose that the country is initially in equilibrium with a certain non-prohibitive tariff. a. Assuming that the tariff is a specific tariff and that its size does not change, what will be the effects on prices, quantities, and welfare of i. A shift to the right in the domestic demand curve (more of the good demanded at each price). ii. A shift to the right in the foreign supply curve (more imports of the good supplied at each price). b. How, if at all, would part (a) be different if the tariff were fixed in ad valorem instead of specific terms? 6. In the partial equilibrium model, when a tariff reaches a certain level it becomes prohibitive. Does that happen also in the general equilibrium small-country model? If not, what happens instead as the size of the tariff becomes ever larger? If so, how would you identify the prohibitive level of the tariff? 7. Use the two-good Heckscher-Ohlin Model to work out how a country's PPF is expanded when it experiences equal percentage increases, say 10%, in both its labor force and its capital stock. Then, assuming homothetic preferences and the presence of a fixed, positive but non-prohibitive, ad valorem tariff on its imports of (relatively labor-intensive) Food, work out the effects of this growth on its tariff revenue (in units of Cloth) and also on the real wage of labor under the assumption that the country is a. Small. b. Large.Econ 441 Alan Deardorff Fall Term 2008 Problem Set 6 Page 3 of 3 8. The diagram below shows the PPF of a small, two-sector economy, together with points representing the goods that it consumes under free trade, D, and those that it consumes under a certain tariff, D,. Perhaps surprisingly, this should be enough information for you to derive the free-trade relative price of food, the domestic relative price of food under the tariff, and therefore the quantities of food and cloth produced both with and without the tariff. In addition, if you assume homothetic preferences, you can make a good guess at what the indifference curves look like through Dyand D. Do all this. And then, with the help of a ruler, estimate the ad valorem size of the tariff. D,Problem Set 7 Topics in Trade Policy 1. The figure below shows domestic demand, D, for a good in a country where there is a single domestic producer with increasing marginal cost shown as MC. Imports of the good are available from abroad at a fixed price p*, subject to a tariff of either f or f2, which are indicated by the points p*+ and p*+2 on the vertical axis. Suppose now that domestic demand for the good expands, for each price, to 25% more than it was before, so that the demand curve shifts out as shown, its vertical intercept remaining the same. Determine how profits of the firm, and tariff revenue of the government, will be affected by this change. p MC p*+1 D Du- 2. Consider the Cournot Export Duopoly Model two identical fimts from different countries producing and selling a homogeneous product into (only) a third country and engaged in Coumot competition and suppose that the govermnents of both producing countries were to consider providing subsidies for their exports of the good. Using an analysis similar to what we did in class for optimal tariffs and retaliation in competitive markets, determine what you can about the Nash equilibrium export subsidies and the well being of the two exporting countries in that Nash equilibrium compared to ee trade. Also. how does welfare in the third {importing} country compare at that equilibrium to what it would have been with free trade? 3. The \"tariff equivalent" of an import quota is the tariffthat would have led to the same quantity of imports as the quota. Assuming perfect competition. how does the tariff equivalent of a particular quota change if there is an increase in [i.e.1 a rightward shift of) the importing country's demand for the good? How does it change if there is an increase in the importing country's supply of the good? Is it possible for either of these changes to cause the tariff eqttivalent of the quota to become negative? 4. A few years ago, President Bush levied tariffs on imports of steel. His purpose was to increase employment in the steel indusn'y to a certain level in order to achieve the benefit of these additional workers voting for Republican candidates in the November election. Based on the small-open economy. partial equilibrium model of a tariff, is this the economically optimal way for him to accomplish this objective? If not, what policy or policies might have achieved it at lower cost to the American economy? Do you think these policies would have been politically acceptable? 5. Suppose that. prior to entering a free trade agreement with the European lLTnion1 Maeedonia imports 3ft tons of steel a year from Russia1 subject to a 100% tariff. After entering the ee trade agreement. it imports Til tons of steel ii'om Europe and none from Russia Based on this information alone. can you tell whether Macedonia has gained or lost by reducing its steel tariff to zero against imports 'om the EU? If so1 show why; if not, show what the answer depends upon