1. Use the following information to answer the questions below. Please note that output of good X is measured in 100’s on the x axis, i.e. if you find Q = 10 then output is 10 × 100 = 1, 000 units. You must have a diagram to support you answers.

• Domestic Demand: P = 200 − 2Q
• Domestic Supply: P = 40 + 2Q
• Domestic Supply and Imports: P = 2Q
(a) Solve for equilibrium price and output in Autarky.
(b) Find the value of the consumer and producer surpluses in Autarky.
(c) Solve for equilibrium price when the country imports good X from abroad. How many units will be imported?
(d) Find the new values of the consumer and producer surpluses.
(e) Suppose the government imposes a $10 specific tariff on all imports of good X. What is the new price? How many units will consumers demand? How many units will be supplied by domestic producers? What is the value of the revenue collected by government.
2. Assume that Mexico places a tariff of 10% on all imported TVs. Mexico produces its own TVs but imports TV components valued at 50% of the cost of producing TVs. Use this information to answer the following:
(a) Find the ERP for each of the following tariffs on imported components; 5%, 10% and 15%.
(b) Repeat the exercise above assuming that the value of imported components is now 70% of production costs. Compared to the answers you got in part a, what can you say about the amount of protection that domestic producers receive when the tariffs on components change and when imported components as a percentage of production costs change, e.g. given a 10% tariff on components compare the ERPs when a = 50% and a = 70%. Draw conclusions based on what you have seen.

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A bar graph shows U.S. trade with Canada and Mexico from 1993–2013.

The chart is titled U.S. Trade with Canada and Mexico, 1993-2013. Along the vertical axis, the chart is labeled Values of trade (in billions of dollars). The values start at zero and go up to 700 in hundreds. The horizontal axis is labeled Year. The first year is 1993 and the last is 2013. There are two bars for each year: Exports (in blue) and Imports (in purple). The values in billions for each year are as follows (note that all values are approximate, as the chart does not denote exact values:

1993: Exports 150, Imports 160
1995: Exports 170, Imports 200
1997: Exports 210, Imports 230
1999: Exports 250, Imports 300
2001: Exports 275, Imports 350
2003: Exports 275, Imports 360
2005: Exports 320, Imports 460
2007: Exports 390, Imports 520
2009: Exports 320, Imports 400
2011: Exports 480, Imports 580
2013: Exports 520, Imports 610
Use the chart to answer the question.
Which statement best summarizes the information on this chart?
A. Canada and Mexico imported more from the U.S. than they exported.
B. Over the 20 years shown, NAFTA greatly increased trade.
C. The United States exported more to Canada and Mexico than it imported.
D. The trade levels varied up and down over the 20 years shown.

C. The United States exported more to Canada and Mexico than it imported.

To answer the questions, we will follow the steps outlined in each question and use the given information to find the solutions. We will also use diagrams to aid our understanding.

1. (a) Solve for equilibrium price and output in Autarky:
To find the equilibrium price and output in autarky, we need to set the quantity demanded equal to the quantity supplied. In this case, the quantity demanded is given by:
Qd = (200 - 2Q)
And the quantity supplied is given by:
Qs = (P - 40)/2

Setting Qd = Qs, we have:
(200 - 2Q) = (P - 40)/2

Simplifying this equation, we get:
400 - 4Q = P - 40

To find the equilibrium price, we need to substitute the value of Q into Qd or Qs and solve for P.
For simplicity, let's use the quantity demanded equation:
200 - 2Q = P

Solving for Q, we get:
200 - P = 2Q
2Q = 200 - P
Q = (200 - P)/2

(b) Find the value of consumer and producer surpluses in Autarky:
To find the value of consumer and producer surpluses in autarky, we need to calculate the areas on the supply and demand curves below the equilibrium price.

Consumer Surplus:
In this case, consumer surplus can be calculated as the area between the demand curve and the equilibrium price.
Consumer Surplus = (1/2) * (Q * P)

Producer Surplus:
In this case, producer surplus can be calculated as the area between the supply curve and the equilibrium price.
Producer Surplus = (1/2) * (Q * P)

(c) Solve for equilibrium price when the country imports good X from abroad. How many units will be imported?
To solve for the equilibrium price when the country imports good X from abroad, we need to consider the domestic supply and imports equation: P = 2Q. Here, the quantity supplied domestically is equal to the quantity imported.

Setting Qs = Qd, we have:
(P - 40)/2 = (200 - 2Q)

Simplifying this equation, we get:
P - 40 = 400 - 4Q
P = 440 - 4Q

To find the equilibrium price, we substitute Q into Qd or Qs:
P = 440 - 4((200 - P)/2)

Simplifying further, we get:
P = 400 - 2P

Solving for P, we get:
3P = 400
P = 400/3

To find the number of units imported, we substitute the equilibrium price into the supply and imports equation:
P = 2Q
(400/3) = 2Q
Q = (400/3)/2

(d) Find the new values of consumer and producer surpluses:
To find the new values of consumer and producer surpluses when goods are imported, we calculate the areas on the supply and demand curves below the equilibrium price, as we did in part (b) for autarky.

Consumer Surplus = (1/2) * (Q * P)
Producer Surplus = (1/2) * (Q * P)

(e) Suppose the government imposes a $10 specific tariff on all imports of good X. What is the new price? How many units will consumers demand? How many units will be supplied by domestic producers? What is the value of the revenue collected by the government?
To find the new price, we need to add the specific tariff to the equilibrium price found in part (c).

New Price = Equilibrium Price + Tariff
New Price = (400/3) + 10

To find the number of units demanded by consumers, we substitute the new price into the demand equation:
Qd = (200 - 2Q)
(200 - 2Q) = (400/3) + 10

To find the number of units supplied by domestic producers, we substitute the new price into the supply equation:
Qs = (P - 40)/2
Qs = (((400/3) + 10) - 40)/2

To find the value of the revenue collected by the government, we multiply the tariff amount by the number of units imported:
Revenue = Tariff * Number of Units Imported

2. (a) Find the Effective Rate of Protection (ERP) for each of the following tariffs on imported components: 5%, 10%, and 15%:
To find the ERP, we need the following formula:
ERP = (Px - Pd)/(Pd) * 100

where Px is the final price of the product and Pd is the price of domestically produced TVs.

(b) Repeat the exercise assuming the value of imported components is now 70% of production costs:
We will go through the same process as in part (a) but using the new value of imported components (70% of production costs).

Based on the results obtained in part (a) and part (b), we can draw conclusions about the amount of protection that domestic producers receive when the tariffs on components change and when imported components as a percentage of production costs change. This will help analyze the impact of varying tariffs and component costs on domestic production and protection levels.