Question 4

Home country's demand curve for wheat is D = 100 - 2P, and its supply curve for wheat is S = 20+ 2P. Home one of the largest importers of wheat. Its import demand curve is MD = 90 - 5P; and it faces the following export supply curve: XS = -10 + 5P.

(a)With free trade, determine the equilibrium price and trade volume. (2 pts)

(b)Now home country imposes an ad valorem tariff of 20% on foreign wheat imports. Determine the new trade volume and how the tariff by home country has changed the world wheat price. (4 pts)

(c)Finally, by imposing the import tariff, has home country improved or reduced its net welfare? Draw graph(s) to illustrate and make sure to show your work. (4 pts)