Suppose that the following graph gives the U.S. supply (

S

) of and demand (

D

) for auto

parts (say steering wheels). U.S. automakers can also import steering wheels from

Mexico at $50 each and from Japan at $40 each. Currently, there is a 60% tariff on

imported steering wheels.

a.

. How many steering wheels will the United States import?

b.

. How much tariff revenue will the U.S. government collect?

c.

Suppose that the United States and Mexico become part of NAFTA and there is

free trade between the two countries. Now how many steering wheels will the

United States import?

d.

Calculate the trade creation gains from free trade in steering wheels with Mexico.

e.

Calculate the trade diversion losses from free trade in steering wheels with

Mexico.

f.

Does the United States gain or lose as a result of free trade in steering wheels

with Mexico?