McMaster University Economics and International Trade Questions

Question Description

Consider a small country that produces T-shirts with the following demand and supply functions.

P = 14 – Q and P = 4 + Q

A. Graph and calculate no trade equilibrium quantity demanded/supplied, equilibrium price and consumer and producer surplus.

B. Now suppose that the country (Home) engages in trade and faces the world price, Pw = $6. Graph and calculate free trade consumer and producer surplus. Does Home gain/lose from trade.

C. Concerned about the welfare of the local producers, the Home government imposes a tariff in the amount of $2 (i.e., t = $2). Determine the net effect of the tariff on the Home economy. (Note: Show a, b, and c on the same graph)

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