Consider a partial equilibrium setting, in which Korea exports steel to the
United States. Demand for steel
in the U.S. is given by, D =100 − P/2, where D is the
quantity of steel demanded and P is its domestic price. Supply of steel in U.S. is given
by, Q = P/2, where Q is the quantity supplied. In Korea, the demand for steel is
D* = 50 − P*/2, while the supply of steel is given by Q* = P* .
a) Draw and label the U.S. import demand function and the Korean export supply
b) Find the world price of steel in free trade (assuming Korea and the U.S. are the
only two countries in the world). How much does each country produce in free
trade? How much is traded internationally?
c) Find consumer surplus and producer surplus in each country in free trade.
d) Now suppose President Trump decides to block all imports of Steel from Korea.
What would be the price of steel in the each country? How much steel would be
produced in each country?
e) Find consumer surplus and producer surplus in each country without trade.
f) Comparing your answers to in c) to e), how much does each country gain from
trade? How much do U.S. steel producers gain from Trump's action?
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