Question

Suppose there are 2 countries that have the following supply and demand equations in autarky Country A (I'VE SEEN THE OTHER ANSWERS, DO NOT COPY, OR YOU WILL GET THUMBS DOWN)

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?

c) If the importing country imposes a tariff equal to $10 per unit, what would be the new price in the importing country? (I'VE SEEN THE OTHER ANSWERS, DO NOT COPY, OR YOU WILL GET THUMBS DOWN)

d) If the importing country imposes a tariff equal to $10 per unit, what would be the new price in the exporting country? (I'VE SEEN THE OTHER ANSWERS, DO NOT COPY, OR YOU WILL GET THUMBS DOWN)

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

Answer 1

For country A, Demand: Q=800-2P and Supply: Q=2P-200

Then, its import demand = Demand - Supply = 800-2P - 2P +200 = 1000 - 4P

For country B, Demand: Q=400-2P and Supply: Q=2P-80

Then, its export supply = Supply - Demand = 2P-80-400+2P = 4P-480

b) Under free trade, for equilibrium, Import demand=Export supply

or, 1000-4P^w = 4P^w-480 (where P^w is the world price)

or, 8P^w = 1000+480 = 1480

or, P^w = 1480/8 = $185

c) If the importing country imposes a tariff of $10 per unit, let, price in importing country be denoted as P and that in exporting country be denoted as P*

Then,P = P* + tariff = P*+$10.

Now, for equilibrium, Import demand = Export supply

or, 1000-4P =4P*-480

or, 1000-4(P*+10) = 4P* - 480

or, 1000-4P*-40 = 4P*-480

or, 8P*=1000-40+480 = 1440

or, P* = $180 is the price in exporting country due to tariff

and P= P*+$10 = $180 +$ 10 = $190 is the price in importing country due to tariff.

d) If the imposing country imposes a tariff of $10 per unit,

Price in exporting country is $180 (shown in c).