Unformatted text preview: EC 340 Spring 2011 Problem Set 5 Suppose that the Home imports electrical cable from Foreign. Further suppose that Home levies a $7 specific tariff on imports of cable. Use this information, along with the information in the diagram to the left to answer questions 1 – 5. 1.
Is Home a large or small country (in the technical sense)? How do you know? 2.
What is the value of the terms of trade gain/loss for Home? 3.
Relative to free trade, what is the net welfare effect for Home of the import tariff? 4.
Relative to free trade, what is the net welfare effect for the entire world of the import tariff? 5.
Home is thinking about increasing its tariff to $14. Would this increase Home’s welfare or decrease Home’s welfare? How do you know? North imports sugar from South. With free trade, the price of sugar is $6 per pound. North levies a specific import tariff of $2 per pound on sugar. The price of sugar in North rises to $8. The demand and supply diagram to the right illustrates North’s market for sugar. Use this information to answer questions 6 – 10. 6.
Is North a small country or a large country (in the technical sense)? How do you know? 7.
What is the value of the production distortion in North that is created by the tariff? 8.
What is the value of the consumption distortion in North that is created by the tariff? 9.
What is the terms of trade gain/loss for North that is created by the tariff? 10.
What is the total deadweight loss in North created by the tariff? 11.
Compared with free trade, what is the net welfare effect of the tariff on North? ...
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- Spring '10
- International Economics, net welfare effect