ps2-6333-sp17.pdf - ECO 6333 Trade Policy Spring 2017...

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ECO 6333: Trade Policy Thomas Osang Spring 2017 Due Monday, February 13, 2017 Problem Set 2: Tariff and Non-Tariff Barriers Under Perfect Competition Part I: Consider a small open economy which in free trade is importing food and exporting clothing. 1. Show the free trade equilibrium of the country in a diagram, placing clothing on horizontal axis and food on the vertical axis. Carefully label the PPF (assumed to be concave toward the origin), free trade price line, indifference curve, consumption and production points, income- consumption path, and trade triangle. 2. Now suppose the government introduces an ad valorem tariff at rate t on food imports. Show the tariff equilibrium in the diagram. Carefully label the post tariff domestic price line, post tariff indifference curve, post tariff consumption and production points, post tariff income-consumption path, and post tariff trade triangle. Part II: Aoslia is a small country that takes the world price of corn as given.
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