Home's demand curve for wheat is

D = 10020p

whereas its supply curve is

S = 20 + 20p

The demand curve for Foreign is

D =8020p

and the supply curve is

S =40+20p

1. Derive and graph the autarky equilibrium for Home and Foreign. What is the equilibrium price and quantity for each country?

2. Find a nd graph the equilibrium under free trade. What is the world price? What is the volume of trade?

3. Suppose that Home imposes a specific tariff of 0.5 on wheat imports. Determine and graph the effects of the tariff. In particular, calculate the price of wheat in each country, the quantity of wheat supplied and demanded in each country, and the volume of trade?

4. With the specific tariff of 0.5 per unit of wheat, determine the effect of the tariff on the welfare of each of the following groups: (1) Home import-competing producers; (2) Home consumers; and (3) the Home government.

5. Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.

6. Suppose that Foreign had been a much larger country with the following demand and supply schedules:

D = 800 200p ; S = 400+200p

Note that this implies that the autarky equilibrium in Foreign remains the same. Re- calculate the free trade equilibrium and the effects of a 0.5 specific tariff on wheat by Home. Explain your results intuitively.