This question (each part) to be answered on paper and the photos/scans of the answers uploaded to the Midterm 2 Canvas Assignment which will be open from 9:30 - 9:35 (after the Canvas quiz closes). Show all your work. 1. There are two countries: Home and Foreign. There are two goods: Guitars (G) and Drums (D). With free trade, the Home country exports Guitars and imports Drums. Home is a large country. (a) Define the Terms of Trade for the Home country. Use a graph showing the world relative supply of Guitars and the world relative demand for Guitars to show how an export tariff/tax put in place by the Home country will impact the Home country's Terms of Trade. (4 marks) (b) Using a figure that shows the Home country's PPF with Guitars on the horizontal axis and Drums on the vertical axis, show how the trade policy described in (a) will impact the production of goods in the Home country. Your figure should clearly and neatly show the production with free-trade, the production under the trade policy and all relevant relative price lines (clearly labelled). (5 marks) (c) Let the Guitar industry be monopolistically competitive. The cost function for production of a guitar is the same in both Home and Foreign: C(q) = 120000 + 200q where q is the quantity of guitars. The only way that Home and Foreign differ is the size of the market for Guitars. S = 1000 at Home and S' = 1500 in Foreign. Derive the relation between average cost of a Guitar and the number of firms for (1) Home in autarky and (ii) the world market. Sketch the two average cost relations in the same graph. (5 marks) (d) Let the demand for Drums at Home be described by the demand function of = 1000 - 3p. The supply of Drums at Home is described by the supply function q' = 2p - 200. The foreign country has an export supply function: q* = 4p - 240. Determine the change to the Home country's Total Surplus if Home goes from allowing free trade of Drums to setting a specific import tariff on drums, t=$90. (6 marks) Quiz saved at 8:58am Submit Quiz MacBook Pro