Question

Suppose there are 2 countries that have the following supply and demand equations in autarky (DO NOT COPY ANSWERS)

Country A

Demand: Q = 800 - 2P

Supply: Q = 2P - 200

Country B

Demand: Q = 400 - 2P

Supply: Q = 2P - 80

b)What would be the Free Trade Price? DO NOT COPY ANSWERS)

c) If the importing country imposes a tariff equal to $10 per unit, what would be the new price in the importing country? DO NOT COPY ANSWERS)

d) If the importing country imposes a tariff equal to $10 per unit, what would be the new price in the exporting country? DO NOT COPY ANSWERS)

e) If the importing country imposes a tariff equal to $10 per unit, what would be the new price in the exporting country?

Answer 1

Let us calculate the equilibrium price in both countries in absence of trade.

Country A

Set quantity demanded=quantity supplied

800-2P=2P-200

4P=1000

P=$250

Country B

Set quantity demanded=quantity supplied

400-2P=2P-80

4P=480

P=$120

We can see price are lower in country B. Country B exports and Country A imports.

Now let us calculate export supply function in country B

S=(2P-80)-(400-2P)=-320+4P

Now let us calculate import demand function in country A

D=(800-2P)-(2P-200)=1000-4P

b)

In free trade, Put S=D

-320+4P=1000-4P

1320=8P

P=$165

Free trade price is $165

c)

Let country A imposed a tariff of $10

Country B gets P-10 in place of P paid.

So, Supply function is changed to

S'=-320+4*(P-10)=-320+4P-40=-360+4P

Set D=S'

1000-4P=-360+4P

1360=8P

P=170

It means price paid by importing country is $170

d)

Price in exporting country=Price paid in importing country-Tariff =170-10=$160   

e)

Same question as (d)

Price in exporting country=Price paid in importing country-Tariff =170-10=$160