This question is about India, a cotton-producing country that also imports a lot of cotton to feed its growing textiles and apparel output which is exported globally. The prevailing world price of cotton is $1 per pound, multiple dollars lower than the price that would prevail in India if the country didnt import cotton and relied instead entirely on its own domestic cotton output (the autarky price).

1. First, lets simply draw graphs of the scenarios below that show qualitatively whats going on. The graphs need not be to scale but should be labelled appropriately.

(a) Show the Indian cotton market in autarky, illustrating where Indias domestic cotton price would be relative to the prevailing world price, and the equilibrium amount of cotton that would be grown and used in India.

Illustrate consumer and producer surplus on the graph. Remember, CS is the area above the price up to the demand curvea measure of the value buyers of the product receiveand PS is the area below the price down to the supply curvea measure of the value producers of the product receive.

(b) Now suppose India opens to cotton imports, and that its imports arent so large that they cause a noticeable change in the global prevailing price. On a new graph illustrate the

• quantity demanded of cotton
• quantity supplied of cotton by domestic producers
• quantity of cotton imports
• levels of CS and PS

(c) Make a qualitative assessment: has Indias overall welfare (the sum of CS and PS) risen or fallen with the opening to trade? Explain.

(d) Suppose that to protect the livelihood of poor Indian cotton farmers, India imposes a tariff of $1 per pound on cotton imports, raising the domestic price of cotton to $2 (still below the autarky price of cotton that would prevail with no imports). On a new graph, illustrate the four key areas that represent the change in PS and CS, the tariff revenue, and the PDL and CDL.

2. Now lets work this out quantitatively. Domestic demand for cotton is given by Q_D = 2250 300P, while domestic supply is Q_S = 125 + 250P. Prices are in dollars per pound of cotton, and quantities are in 1,000s of metric tons (so, for example, a Q of 5 is really 5,000 metric tons of cotton).

(a) What would Indias autarky cotton price be? Set Q_D = Q_S and solve for the market equilibrium.

(b) After beginning to trade, what would be the quantity of cotton

• Consumed/bought by India?
• Produced at home by India?
• Imported by India?

(c) Calculate the dollar value of Indias PS and CS under autarky, and under free trade. (Remember, the formula for the area of a triangle is base x height x 0.5. Lets not worry about converting quantities into actual pounds of cotton, and continue to use quantities measured in units of 1,000s of metric tons.) What is the value of Indias gains to trade?

(d) With the $1 tariff, what is the value of tariff revenue, and the values of the PDL and CDL? (Again, dont worry about converting quantities into actual pounds of cotton.)