Reference no: EM133130046
TARIFFS
Suppose we have the following demand and supply functions (taken from Assignment #2).
HOME: Demand P = 100 - ½ Q Supply P = ½ Q
FOREIGN Demand P = 200 - 2 Q Supply P = ¼ Q
1: Two-country model with IMPORT TARIFFS: use the functions above
a) Calculate the free trade world price and the quantity traded. Also find CS, PS, and SS for each country in free trade.
2: Two-country model with IMPORT TARIFFS: use the functions above
a) Suppose the importer imposes an import tax of $4 per unit. Calculate the new equilibrium world price. What are Home's and Foreign's domestic prices? Hint: use the ED = ES where ED is adjusted for the tariff τ to solve for Pw as a function of the import tariff.
b) Show that the tariff lowers (CS + PS).
c) Find the change in Social Surplus in each country. Recall that import tariffs revenue need to be included in social surplus (EG: SS = CS + PS + revenue). Compare the change in (CS + PS) relative to the revenues generated.
d) Does the importer gain from the tariff. Does the exporter? Show and explain fully. Give the intuition.
3: Two-country model with EXPORT TARIFFS: use the functions above and start in free trade equilibrium.
a) Suppose the exporter imposes an export tax of $4 per unit. Assume the importer does not impose any tariffs. Calculate the new equilibrium world price. What are the tariff-ridden domestic prices?
b) Find the change in Social Surplus in each country. Recall that import tariffs revenue need to be included in social surplus (EG: SS = CS + PS + revenue). Compare the change in (CS + PS) relative to the revenues generated.
c) Does the importer gain from the tariff. Does the exporter? Show and explain fully. Contrast with the importer's tariff.
4: NASH EQUILIBRIUM TARIFFS: use the functions above.
a) Find the Nash Equilibrium in Tariffs (τim , τex). If you use a spreadsheet, show that any deviation from the optimal import tariff lowers welfare for the country.