International Trade

Question 3 (35 points) Consider a model with two countries, France and Germany. France exports Roquefort to Germany, and Germany exports sauerkraut to France. In each country, the demand for Roquefort is given by the demand curve DR = 100-PR, where DR is the quantity demanded and PR is the price of Roquefort. In each country, the demand for sauerkraut is given by the same demand curve, i.e., DS = 100 - PS, where DS is the quantity demanded and PS is the price of sauerkraut. The supply of Roquefort in France is given by SR = 2PR, where SR is the quantity supplied, and the supply of Roquefort in Germany is given by SR = PR The supply of sauerkraut in France is given by S'S = PS, and the supply of sauerkraut in Germany is given by SS = 2PS 1. (10 points) Suppose the government of France imposes a $10 per unit import tax on sauerkraut. Find the world price of sauerkraut, the domestic price in France, and the tariff revenue collected by the French government under this policy. 2. (10 points) Suppose that instead of using a tariff, the French government achieved the same reduction of sauerkraut imports using a Voluntary Export Restraint (VER), allowing Germany to capture the quota rents. Draw a diagram showing how welfare in France is affected by this policy, compared to allowing for unrestricted sauerkraut imports. NO 3. (15 points) Suppose that each government maximizes its own country's social welfare - given by the sum of producer surplus, consumer surplus and tariff revenue. Derive the Nash equilibrium in tariffs. Would France and Germany benefit from cooperation to maintain free trade