Problem 2: Trade Taxes E: Quotas [12 Points] Suppose that we are considering the domestic market for tires and live in Indonesia. Suppose also that the domestic Demand for tires is given by: p = 9D 2Q And that the domestic Supply oftires is given by: p = ID + DEG Suppose also that this tire market begins in autarky. 6. What would be the domestic p* and [1* under autarky? Show your work. [2 points] Suppose now that Indonesia opens up to international trade, and that the international [world] price is equal to S40 per unit [pw = S413}. ?. What will Indonesia's Domestic Demand for tires be after they open up to trade? What will be Indonesia's Domestic production of tires after they open up to trade? What quantity of tires will Indonesia import or export? Show your work. [2 point] Suppose now that there is a crash in the price oftires internationally, and that the world price drops from S40 to S15. 3. How much does Producer Surplus decline as a result of this price crash? Show your work. [1 point] Now suppose also that producers have become very upset about this surplus decline, and that they successfully lobby for support from the Indonesian government. The Indonesian Government institutes an import tariff of S? per unit. 9. What are the changes in Producer Surplus and Consumer Surplus as a result of this Tariff? How much Revenue does this tariff raise? Show your work. [3 points] Suppose that instead of an import tariff, the Indonesian government wanted to implement in import quota that would generate the same change in Producer Surplus as the S? tariff. 1D. What is the size of this import Quota that generates this same change in Producer Surplus as the S? Tariff? Show your work. [2 points] 11. What is the Deadweight Loss under this Import Quota? Show your work. [2 points] Problem 3: Comparative Advantage [6 Points] Suppose that we are considering the trade between Peru and Ecuador. Suppose that each produce only two goods, and that they each have $120,000 of resources to spend on the production of these goods. Ecuador: Ecuador can produce one unit of oil at a cost of $4 per unit. . Ecuador can produce one unit of beef at a cost of $16 per unit. Peru: . Peru can produce one unit of oil at a cost of $10 per unit. . Peru can produce one unit of beef at a cost of $20 per unit. 12. Which country has the comparative advantage in producing oil? Which has the comparative advantage in producing beef? Show your work. [2 points] 13. Draw the Production Possibilities Frontier (PPF) for Peru under autarky. Draw this PPF with oil on the x-axis and beef on the y-axis. Label both the x-intercept and y-intercept. [2 points] Suppose now that Peru and Ecuador start trading with each other at a rate of 3 units of oil for 1 unit of beef. 14. Draw the Production Possibilities Frontier (PPF) for Peru under this trade agreement. Again, draw this PPF with oil on the x-axis and beef on the y-axis. Label both the x-intercept and y- intercept. [2 points]