The demand and supply curves for an import-competing industry in a country are given by: D = 500 – 10P, S = 100 + 10P. Similarly, the respective demand and supply curves of foreign country for this industry are given by D* = 400 – 10P, S* = 200 + 10P.
a. What will be the price in two countries if there is no trade between them?
b. What will be the free trade price between two countries, and what is the volume of trade?
c. What is the demand and supply in domestic economy in free trade?
d. Let the Home country introduce a special tariff rate of $0.5. What will be the world market-clearing price, home price and foreign price? What is the trade volume?
e. Calculate the production and consumption losses and terms of trade gain for home country.
f. What is the total effect on welfare? Show each component graphically.
g. What will be the distortion losses if the country uses an import quota of 50 units instead of tariff? Assume that the domestic residents receive quota rents.