Suppose the supply and demand curves for textiles in the home country are:

P=1+QS/20, P=5QD/20

Suppose the supply and demand curves for textiles in the foreign country are:P=2+Qs/20, P=4Qd/20

a) Suppose initially there is no trade between the two countries. Compute the no-trade price of textiles in the two countries and show the two no-trade equilibria using a well-labeled graph.

b) Now suppose the two can trade textiles freely. Show that when the world price of textiles is 1.5 one country's exports match the other country's imports. Which country exports textiles? Show the free trade equilibrium in the same graphs that were used in part a.

c) The importing country decides to place a tariff of 0.5 per unit of textiles imported. Rather than have you solve for the new equilibrium, you will next try a couple of prices to see if they can be the new equilibrium world price. Suppose the foreign price were to remain unchanged at 1.5. How much would the home country want to import and how much would the foreign country want to export? Is this an equilibrium? If, instead, the new foreign price is 1.25, find exports and imports. Is this an equilibrium? Show the equilibrium on a new graph.

d) Show on the graph and compute the effects of the tariff on welfare in the home country and in the foreign country. Be sure to show who gains and who loses from the tariff.