QUESTION 1

For a small country, consider a quota and an equivalent tariff that permit the same initial level of imports. Show this situation in Figure (a). Suppose that there is an increase in domestic demand. If the tariff rate is unchanged and the quota quantity is unchanged, are the two still equivalent? Show this in Figure (b) and explain. Note: graph has Price in the y-axis and Quanity in the x-axis.

QUESTION 2:

Read the article titled: "Tax cuts seen spurring Argentine biodiesel exports this year" from Reuters published on May 30, 2014 and answers the following questions. Assume that Argentina is a "small country" [The article is attached separately]

a) Draw the initial situation in the biodiesel market (i.e. with the original level of export tariff) and identify the areas corresponding to the change of consumer and producer surplus as well as the government revenue. [You do not need to use actual data in the diagram] Note: graph has Price in the y-axis and Quanity in the x-axis.

b) Now apply the tax cut on biodiesel exports. Note that this is not a total elimination of the export tax on biodiesel. Again, identify the areas corresponding to the change in Consumer Surplus, Producer Surplus, and Government Revenues as a result of the tax cut. What is the effect of this policy on biodiesel exports? [You do not need to use actual data in the diagram] Note: graph has Price in the y-axis and Quanity in the x-axis.