TARIFFS DUE:

Suppose we have the following demand and supply functions (taken from Assignment #2).

HOME: Demand P = 100 - Q Supply P = Q

FOREIGN Demand P = 200 - 2 Q Supply P = Q

1: Two-country model with IMPORT TARIFFS:use the functions above

(5 point) a) Calculate the free trade world price and the quantity traded. Also find CS, PS, and SS for each country in free trade.

2: Two-country model with IMPORT TARIFFS:use the functions above

(1 point) a) Suppose the importer imposes an import tax of $4 per unit. Calculate the new equilibrium world price. What are Home's and Foreign's domestic prices? Hint: use the ED = ES where ED is adjusted for the tariff to solve for Pw as a function of the import tariff.

(1 point) b) Show that the tariff lowers (CS + PS).

(1 point) c) Find the change in Social Surplus in each country.Recall that import tariffs revenue need to be included in social surplus (EG: SS = CS + PS + revenue). Compare the change in (CS + PS) relative to the revenues generated.

(2 points) d) Does the importer gain from the tariff. Does the exporter? Show and explain fully. Give the intuition.

3: Two-country model with EXPORT TARIFFS: use the functions above and start in free trade equilibrium.

(1 points) a) Suppose the exporter imposes an export tax of $4 per unit. Assume the importer does not impose any tariffs. Calculate the new equilibrium world price. What are the tariff-ridden domestic prices?

(2 points) b) Find the change in Social Surplus in each country. Recall that import tariffs revenue need to be included in social surplus (EG: SS = CS + PS + revenue). Compare the change in (CS + PS) relative to the revenues generated.

(2 points) c) Does the importer gain from the tariff. Does the exporter? Show and explain fully. Contrast with the importer's tariff.

4: NASH EQUILIBRIUM TARIFFS:use the functions above.

(10 points) a) Find the Nash Equilibrium in Tariffs (^im , ^ex). If you use a spreadsheet, show that any deviation from the optimal import tariff lowers welfare for the country.

TOTAL: 25 POINTS