0N/A -50 150 50 2 40 90 3 30 120 4 20140 10 150 5 15 125 4 20 110 3 25 90 2 30 6

Question

0N/A -50 150 50 2 40 90 3 30 120 4 20140 10 150 5 15 125 4 20 110 3 25 90 2 30 65 1 3535 0 N/A 0 1) Suppose in Autarky economy, both goods have the same price: Pi = P.-3. Solve the equilibrium labor allocation across two sectors and calculate the wage. 2) Suppose the prices change due to openness to trade: P allocation and the new wage. 2, P 5.Solve the new labor 13. Tax, Tariff and Quota: Home: D 100-10P,S =-20 + 10P Foreign: D. = 110-5P,S" =-10 + 5P 1) Solve Home's Autarky equilibrium price and quantity; 2) Solve Foreign's Autarky equilibrium price and quantity 3) If Home's government put a $2 tax on consumer for each good consumed, solve Home's after tax equilibrium price and quantity; Solve Home's government's tax revenue; 4) Suppose now both countries are open to free trade, which country would be the importer? Derive its import demand (MD) curve; 5) Suppose now both countries are open to free trade, which country would be the exporter? Derive its export demand (XS) curve 6) Solve the free trade equilibrium price and trade volume; 7) Solve Home's production and consumption after free trade; 8) Suppose importer's government decides to put an import tariff= $3. solve the after tariff equilibrium price and trade quantity. Solve the importer govemment's tariff revenue. 9) Solve Foreign's production and consumption after tariff, 10) Suppose importer's government decides to put an import quota - 30, solve Foreign's price after quota. 14. Country A is a small country and unable to affect the world price. D = 250-10P S=-50 + 5P Autarky Price = 20 World Price: Pw = 10 1) What is free trade price? 2) Derive A's Import Demand (MD); 3) Suppose A has an import tariff: $2. What is the price after tarif? 4) Solve the tariff revenue.

Explanation / Answer

1). Consider the given problem here we have given the demand and supply function of “Home (H)” and “Foreign (F)” countries.

So, in “H” the demand function be, “D = 100 – 10*P” and supply function be, “S = (-20) + 10*P”.

So, at autarky equilibrium “D = S”, => 100 – 10*P = (-20) + 10*P, => 100 + 20 = 10*P +10*P.

=> 120 = 20*P, => P = 120/20 = 6. Now, at P=6, Q=40.

So, at the autarky equilibrium the price quantity combination in Home country is given by, “P=6” and “Q=40”.

2).

So, in “F” the demand function be, “D* = 110 – 5*P” and supply function be, “S* = (-10) + 5*P”.

So, at autarky equilibrium demand must be equal to supply, => “D* = S*”, => 110 – 5*P = (-10) + 5*P,

=> 110 + 10 = 5*P +5*P, => 120 = 10*P, => P = 120/10 = 12. Now, at P*=12 Q*=50.

So, at the autarky equilibrium the price quantity combination in Foreign country is given by, “P*=12” and “Q*=50”.

3).

Now, suppose govt. impose a tax of $2 on buyers in “H”. So, now the new demand function of the good is given by, “D = 100 – 10*(P - 2) = 100 – 10*P + 20 = 120 -10*P” and supply function be, “S = (-20) + 10*P”.

So, at autarky equilibrium, “D = S”, => 120 -10*P = (-20) + 10*P, => 120 + 20 = 10*P +10*P.

=> 140 = 20*P, => P = 140/20 = 7. Now, at P=7, Q=30 (by substituting P=7 at “D=100-10*P”).

So, at equilibrium the price quantity combination in Home country is given by, “P=7” and “Q=30”. So, “tax revenue” is “2*30=$60”.

4).

The equilibrium price in “H” is “Ph=6” and in foreign is “Pf=12”, since Ph < Pf, => “H” is exporter and “F” is importer.

So, we need to find out “import demand (IM)” for “F” and “export supply (XS)” for “H” country.

Now, in “F” the demand function be, “D* = 110 – 5*P” and supply function be, “S* = (-10) + 5*P”.

So, IM = D – S = (110 – 5*P) – (-10 + 5*P) = 110 – 5*P + 10 - 5*P = 120 – 10*P.

=> The import demand function be “IM = 120 – 10*P”.

5).

Now, in “H” the demand function be, “D = 100 – 10*P” and supply function be, “S = (-20) + 10*P”.

So, the “Export Supply” function is given by, “S – D”, => (-20 + 10*P) – (100 – 10*P).

=> -20 + 10*P – 100 + 10*P = (-120) + 20*P.

=> The “XS” function is “(-120) + 20*P”.

6).

Now, under free trade situation “IM” must equal to “XS”. => 120 – 10*P = (-120) + 20*P.

=> 120 + 120 = 30*P, => 30*P = 240/30 = 8. So, the free trade equilibrium price be “Pw=8”.

Now, at “Pw=8”, “IM=XS=40”, => at the free trade equilibrium the combination of price and trade is given by “8” and “40” respectively.

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