Reference no: EM133080232

Tariffs never make small countries better off, but there are cases where they can make a large country better off. Draw side-by-side graphs for a good (call it "toothpicks") where the small country can produce the good at a lower price than the large country. In this problem: SA : P =5 + 1.1Q DA : P =14 - 1.1Q SB : P =2 + 1.1Q DB : P =10 - 1.1Q Note that there is a worked example similar to this in the lesson. DO NOT just copy what was done in the lesson. Think through the problem independently and be sure to explain your notation.

a) Which country is the small country? How do you know?

b) Show the domestic price and quantity in each market, free trade price (needs to be the same in both countries), and the imports and exports in both countries. Be sure to label prices and quantities on your graph.

c) The large country imposes a tariff of T = $1.00 resulting in a domestic price that is below its autarky price. What happens to the world price after this tariff? Why? Note: you do not need to calculate actual numbers for this part.

d) Show the tariff on the graph. How much is imported now? How much is exported?

e) Show on the graph (and describe in words) how you would know if this tariff is welfareenhancing.