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Question 4 (The instruments of Trade Policy) (a) Home's demand curve for wheat is D=80-10P. Its supply curve is S=20P-10. Derive and graph Home's import
Question 4 (The instruments of Trade Policy) (a) Home's demand curve for wheat is D=80-10P. Its supply curve is S=20P-10. Derive and graph Home's import demand schedule. What would the price of wheat be in the absence of trade? (b) Now add Foreign, which has a demand curve D*=90-20P and a supply curve S*=40+20P. Derive and graph Foreign coutry's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade. (Hint: use the definition of export supply curve) (c) Now allow Foreign and Home to trade with each other. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade? Now suppose Home country imposes a specific tariff of 0.5 on wheat imports. Assume Home is a large country. (d) Determine the effect of the tariff on: (1) the price of wheat in each country; (2) the volume of trade. (Hint: home market price P= P*+0.5, P* is foreign price) (e) Determine and graph the welfare effect of the tariff: (1) The total deadweight loss of producers and consumers; (2) the terms of trade gain. Is the total welfare effect of the tariff positive or negative
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