Question

Assume that the U.S. is a large country in the market for flip-flops.

U.S

Q Supply= 10P

Q Demand= 105-5P

ROW

Q Supply= 20P

Q Demand= 90-10P

1. calculate the free trade price, based on supply and demand in both the U.S. and the Rest of the World (ROW).

Suppose the U.S —as a large country—puts a $1 tariff on this good. What will be:

a. the equilibrium price (PUS) in the U.S.?

b. the equilibrium price (PROW) in the ROW? c.

the equilibrium quantity of U.S. imports (and exports from the rest of the world) in thousands of pairs per week?

Answer 1

1. The import demand of the domestic nation is excess demand of the nation, ie , ie or . The export supply of ROW will be the the excess supply over demand of ROW, ie , or or .

The world trade equilibrium will be where the import demand will be equal to the export supply, ie or or , which will be the equilibrium price in the free trade equilibrium price. At this price, the quantity imported and exported will be , ie or .

__________________

After imposing tariff, which is basically tax on export suppliers, the graph is as below.

(a) The export supply curve would be , as the sellers would get price minus tariff t=$1, and hence . The new equilibrium will be at , ie or , which would be the price the domestic nation faces.

(b) Equilibrium price in the ROW would be dollars, as this is the price the sellers receive after the tariff.

(c) Equilibrium import quantity would be or units.