This question has two parts (A & B): A.) Suppose that Country A has domestic fir

Question

This question has two parts (A & B):

A.) Suppose that Country A has domestic firms that could supply its entire market for Product X at a price of $10, while Country B firms could supply Product X at $8 and Country C firms at $6. If Country A initially has a 50 percent tariff on imports of Product X and then forms a free trade area with Country B,

            a.         trade creation and welfare gains for Country A will occur

            b.         trade creation and welfare losses for Country A will occur

            c.         trade diversion and potential welfare losses for Country A will occur

            d.         trade creation and welfare gains for Country C will occur

B.) In Question A, suppose instead that Country A initially has a 100 per cent tariff on imports of Product X; if all other assumptions remain the same,

            a.         trade creation and welfare gains for A will occur

            b.         trade diversion and welfare gains for A will occur

            c.         trade diversion and welfare losses for A will occur

            d.         trade diversion and welfare losses for C will occur

Please provide with correct choice for each part of the question and explain it.

Explanation / Answer

This question has two parts (A & B): A.) Suppose that Country A has domestic fir

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