hw6_solutions - Econ 4550/6550 International Trade...

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Econ 4550/6550 International Trade Assignment 6/Solutions 1. Refer to the above figure and answer the following questions. (a) In the absence of trade, how many Widgets does this country produce and consume? (b) In the absence of trade, what is the country s consumer plus producer surplus? (c) With free trade and no tariffs, what is the quantity of Widgets imported? (d) With a specific tariff of $3 per unit, what is the quantity of Widget imports? (e) What is the loss of Consumer Surplus due to the tariff? (f) What is the lowest specific tariff which would be considered prohibitive? [6 x 2 = 12] Answer: (a) In the absence of trade, the country must produce everything it wants to consume; so domestic demand must equal domestic supply and the country produces and consumes 60 widgets. (b) Notice that both the domestic demand and supply curves have the same slope (tan = perpendicular/base = 1/10 for both curves). Therefore, consumer and producer surplus in the absence of trade will be identical. These will be given by 0.5(60)(6) =$180 each. So consumer surplus plus producer surplus is $360.
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