solve all the followinghhhh

Tariffs never make small countries better off, but there are cases where they can make a large country better off. Draw side-by-side graphs for a good (call it "toothpicks") where the small country can produce the good at a lower price than the large country. In this problem: SA : P =5 + 1.1Q DA : P =14 1.1Q SB : P =2 + 1.1Q DB : P =10 1.1Q Note that there is a worked example similar to this in the lesson. DO NOT just copy what was done in the lesson. Think through the problem independently and be sure to explain your notation.

a) (5 points) Which country is the small country? How do you know?

b) (15 points) Show the domestic price and quantity in each market, free trade price (needs to be the same in both countries), and the imports and exports in both countries. Be sure to label prices and quantities on your graph.

c) (10 points) The large country imposes a tariff of T = $1.00 resulting in a domestic price that is below its autarky price. What happens to the world price after this tariff? Why? Note: you do not need to calculate actual numbers for this part.

d) (10 points) Show the tariff on the graph. How much is imported now? How much is exported?

e) (10 points) Show on the graph (and describe in words) how you would know if this tariff is welfareenhancing.hh

Consider a horizontally differentiated product market in which two firms are located at any points l1 and l2 on the real line, respectively, with the notation l1 l2. Firms produce at marginal costs c. There is a continuum of consumers of mass 1 who are uniformly distributed on the unit interval. They have unit demand and have an outside utility of . A consumer located at x [0; 1] obtains indirect utility v = max (v1; v2) with v1 = r (x l1) 2 p1 if she buys one unit from firm 1 and v2 = r (l2 x) 2 p2 if she buys from firm 2. Firms have marginal costs equal to c.

a. Suppose that prices are regulated at pi = 2c. In the game in which firms simultaneously decide where to locate their product, characterize the Nash equilibrium.

b. Determine the demand function for each firm for each admissible price pair (p1; p2) given locations l1 and l2.

c. Suppose that the two firms simultaneously set prices. Determine the market equilibrium for all possible combinations of (l1; l2).

d. Suppose that the social planner chooses first-best optimal prices. Which price pairs would be socially optimal for the pair of locations l1 = 0 and l2 = 1/2?

e. Compare your results obtained in (c) and (d) for locations l1 = 0 and l2 = 1/2. Is the equilibrium socially efficient? Depending on your answer elaborate on the sources of the inefficiency or give the reason for efficiency.

Consider a horizontally differentiated product market in which two firms are located at any points l1 and l2 on the real line, respectively, with the notation l1 l2. Firms produce at marginal costs c. There is a continuum of consumers of mass 1 who are uniformly distributed on the unit interval. They have unit demand and have an outside utility of . A consumer located at x [0; 1] obtains indirect utility v = max (v1; v2) with v1 = r (x l1) 2 p1 if she buys one unit from firm 1 and v2 = r (l2 x) 2 p2 if she buys from firm 2. Firms have marginal costs equal to c.

a. Suppose that prices are regulated at pi = 2c. In the game in which firms simultaneously decide where to locate their product, characterize the Nash equilibrium.

b. Determine the demand function for each firm for each admissible price pair (p1; p2) given locations l1 and l2.

c. Suppose that the two firms simultaneously set prices. Determine the market equilibrium for all possible combinations of (l1; l2).

d. Suppose that the social planner chooses first-best optimal prices. Which price pairs would be socially optimal for the pair of locations l1 = 0 and l2 = 1/2?

e. Compare your results obtained in (c) and (d) for locations l1 = 0 and l2 = 1/2. Is the equilibrium socially efficient? Depending on your answer elaborate on the sources of the inefficiency or give the reason for efficiency.

Jerry the repairman works in the town of Prattville. Jerry would prefer not to pay income tax on the revenues he receives in exchange for performing household repairs. As such, he asks to be paid in cash by his clients whenever possible. If he is paid in cash, it makes it possible for him not to report the income and so to evade income tax. Suppose that his gain for not reporting his cash income is 10. If he does not report his income when he has been paid by check, however, he can anticipate a loss due to fines of 50. His clients prefer to pay by check since this does not require them to lose time going to the bank each time they call the repairman. The clients face a loss in terms of inconvenience of 5 when they pay by cash. a. Depict the "game" played by Jerry and a representative client where the possible moves by Jerry are to "report" or "not report" income while the possible moves by the client are to pay in "cash" or "check". What is/are the Nash equilibrium of this game? Does the government collect any tax revenue at this equilibrium? Explain with payoff matrix. b. The government now introduces a Value Added Tax (VAT) to be added onto the amount paid by the client when repair services are received. Jerry suggests the following to his clients: "If you pay me in cash, we will not increase the bill by the amount of the VAT. This will result in a payoff to you of 5. If you pay me by check, we must add the VAT to the amount of the bill." Show how the introduction of the VAT changes the payoffs in the game matrix of part (a). What

is/are the new Nash equilibrium of this game? Does the government's tax revenue go up when the VAT is introduced? Explain with payoff matrix.

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