| Chapter
18 |
Suppose
country A has a free trade import price of $10, and normally imports this
product from country C which is the low cost producer. Suppose further
that country A imposes a specific tariff of $10 per unit on imports of
this product, which causes the price to be $20. At this price, domestic
producers are willing to supply 60 units of the good, and domestic consumers
demand a quantity of 80 units. This, of course, means that A imports 20
units from country C.
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Graph
the following curves by clicking here
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a.
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Label
the vertical axis "P" and the horizontal axis "Q."
Draw and label a demand curve and a supply curve.
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b.
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Draw
a horizontal line representing the free trade price of $10.
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c. |
Draw
a second horizontal line representing the tariff-inclusive price of $20.
Mark the quantities supplied and demanded on the horizontal axis as 60 and
80, respectively. |
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Now
suppose that country A enters into a free trade agreement with country
B, but not with country C. Now, although the low-cost producer of this
good is still country C, country B can sell its products in country A
duty-free. As a result, suppose the price of this product falls to $15,
while quantity supplied falls to 40 and quantity demanded rises to 120.
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d. |
Draw
a third horizontal line representing the new domestic price of $15. Mark
the quantities supplied and demanded on the horizontal axis as 40 and 120,
respectively. |
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e. |
Calculate
the area that represents the gain in welfare that comes from having a
lower price.
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f. |
Calculate
the area that represents the loss in tariff revenue (not captured by A's
consumers).
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g. |
Is country
A better or worse off as a result of the free trade agreement?
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View
graphing answers to question 1 by clicking  |
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View
text answers to question 1 by clicking |