# Homework 2- - HOMEWORK#2 SUGGESTED SOLUTIONS 1 Gains from Trade(20 points Simerania is a country with a comparative disadvantage in shoes In

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HOMEWORK #2 SUGGESTED SOLUTIONS 1. Gains from Trade (20 points) Simerania is a country with a comparative disadvantage in shoes. In autarky, the price of shoes in Simerania is \$150, and the equilibrium quantity is 100,000 units. After trade liberalization, Simerania imports shoes at the world price of \$70. Its consumption goes up to 300,000 units while the production declines to 50,000 units. i) Draw a graph to illustrate the scenario above (8 points) P shoes S domestic 150 70 IMPORT world price D 50 100 300 Q shoes (in thousands) ii) Calculate the change in consumer surplus, producer surplus, and total welfare in Simerania following trade liberalization. (12 points) CS = (150 - 70) x (100,000 + 300,000)/2 = \$16,000,000 PS = - (150 – 70) x (50,000 + 100,000)/2 = - \$6,000,000 TW = CS + PS = \$16,000,000 - \$6,000,000 = \$10,000,000

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2. Small Country Tariffs (20 points) Merania is a small importer of pianos. Assume that the world price of pianos is \$1500. Initially, Merania does not have any tariffs on pianos. Its consumers buy 50,000 units of pianos per year while domestic annual production is 5,000. Piano producers in Merania convince the trade minister that the piano sector is essential for national defense, and hence it deserves protection. As a result, Merania starts imposing a tariff of 200% on piano imports. Annual piano consumption goes down to 20,000 units while annual domestic production jumps to 10,000 units. i) Draw a graph illustrating the scenario above. (8 points) P S domestic Piano S world D tariff 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 your work. (12 points)
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## This note was uploaded on 03/20/2008 for the course ECON 333 taught by Professor Yavas,cemilepan,lu during the Fall '06 term at Pennsylvania State University, University Park.

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Homework 2- - HOMEWORK#2 SUGGESTED SOLUTIONS 1 Gains from Trade(20 points Simerania is a country with a comparative disadvantage in shoes In

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