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Unformatted text preview: 2008 Spring ECON 333 Prepared by Lu Pan ECON333 - Homework 2 - Answer Key Q1. Gains from Trade (20 points) Country A has comparative advantage in shoes. In autarky, the price of shoes in country A is $40, and the equilibrium quantity is 1,000 units. After trade liberalization, country A starts exporting shoes at the world price of $90. Its consumption goes down to 600 units while the production rises up to 1,800 units. i) Draw a graph to illustrate the scenario above. (8 points) Price $90 S $40 D 0 600 1,000 1,800 Quantity ii) Calculate the change in consumer surplus, producer surplus, and total welfare in country A following trade liberalization. (12 points) CS = - (90 - 40) x (1,000 +600)/2 =- $40,000 PS = ( 90-40) x (1,000+ 1,800)/2 = $70,000 TW = CS + PS = -$40,000+$70,000=$30,000 2008 Spring ECON 333 Prepared by Lu Pan 2. Small Country Tariffs (20 points) Country M is a small importer of pianos. Assume that the world price of pianos is $800. Initially, country M does not have any tariffs on pianos. Its consumers buy 100 units of pianos per year while domestic annual production is 25. Piano producers in country M convince the trade minister that the piano sector deserves protection. As a result, country M starts imposing a tariff of 150% on piano imports. Annual piano consumption goes down to 60 units while annual domestic production jumps to 30 units. i) Draw a graph illustrating the scenario above. (8 points) Price S $2000 Tariff Price after Tariff $800 Imports after tariff D World price Free Trade Imports 0 25 30 60 100 Quantity ii) Calculate the following: change in consumer surplus, change in producer surplus, tariff revenue, production distortion cost, consumption distortion cost, net change in welfare. Show revenue, production distortion cost, consumption distortion cost, net change in welfare....
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This note was uploaded on 09/22/2008 for the course ECON 333 taught by Professor Yavas,cemilepan,lu during the Fall '06 term at Pennsylvania State University, University Park.
- Fall '06
- Comparative Advantage