Assume that there are two countries in the world: Home and Foreign. Home’s demand curve for...

Assume that there are two countries in the world: Home and Foreign. Home’s demand curve for wheat is D = 125 - 25P and supply curve is S = 20 + 40P. Suppose that Foreign is a much larger country, with domestic demand D* = 1100 - 300P and supply S* = 650 + 200P.

a) What would the price of wheat be in case of no trade in Home? b) What would the price of wheat be in case of no trade in Foreign?

Now assume that Home and Foreign can trade with each other (no barriers, i.e. free trade).

c) Derive the Home import demand curve equation (no graph required) d) Derive the Foreign export supply curve equation (no graph required) e) Calculate the free trade equilibrium world price of wheat
f) Calculate the free trade equilibrium world trade volume (quantity)

Now assume that Home imposes a specific tariff of 0.3 on wheat imports.

g) Calculate the price of wheat in Foreign in case of the tariff
h) Calculate the price of wheat in Home in case of the tariff
i) Calculate the volume of trade (quantity) in case of the tariff
j) Explain why the volume of trade decreases with imposing the tariff
k) Explain (no graph or calculations required) who gains and who loses from imposing the tariff in case of each of the following groups: Home import-competing producers, Home consumers, Home government.

Answer to E-K)

Expert Solution

Rahul Sunny answered 7 months ago

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Assume that there are two countries in the world: Home and Foreign. Home’s demand curve for...

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