Question

1. Suppose there are two countries home, H and foreign, F engaging in trade of laptops. Assume H is a small importer of laptops and F is the exporter of laptops.

A)Suppose H applies a tariff on imports of laptops from F, and the price in H rises due to this.

B) Is this policy good for home, foreign and for the world market? That is, are there changes in welfare for consumers, producers and the government due to the price changes in different markets? Is there a deadweight loss or strategic gain/loss in any market?

C) Draw the Domestic and World Markets to Illustrate.

d)

how does the welfare at home after tarif (part a) compare if H was large?

what would be the ultimate tarif for home if H were large and why?

how would your answers change if foreign country retailiated its tarif?

Answer 1

a) If H applied a tarrif on import the laptop price rises due to which the demand for laptop reduce due to which the import form foreign country also reduces.

b) This policy is good for home because after tarrif domestic firm able to compete with foreign firm. Now domestic firm benefit with reduction in competition.

The consumer surplus decreases, producer surplus increases and government revenue also increases.

Tarrif also create dead weight loss.

C) see above diagram.

d) Increase in the price of the product on the domestic market increases producer surplus in the industry.

The large importer has a monopsony power. A monopsony arise when there is large single buyer for the product. A monopsony can gain advantage for itself by reducing its demand(import) for a product in order to induce reduction in the ​​​​​​price.