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Econ 5610: International Economics

Problem Set 5

I. The Instruments of Trade Policy

1. Home’s demand curve for wheat is

D = 100 − 20P

Its supply curve is

S = 20 + 20P

a. Derive Home’s import demand schedule.

b. What would the price of wheat be in the absence of trade?

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2. Now add Foreign, which has a demand curve

D∗ = 80 − 20P

and a supply curve

S ∗ = 40 + 20P

a. Derive Foreign’s export supply curve.

b. Find the price of wheat that would prevail in Foreign in the absence of trade.

c. Now allow Foreign and Home to trade with each other, at zero transportation cost.
Find the equilibrium under free trade. (i.e., what is the world price? what is the
volume of trade?)

d. Graph Home’s import demand curve and Foreign’s export supply curve. Be sure
to label all relevant information (axes, intercepts, equilibrium).

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3. Home imposes a specific tariff of 0.5 on wheat imports.
a. Determine the effects of the tariff on the following:
(i) The price of wheat in each country.
(ii) The quantity of wheat supplied and demanded in each country.
(iii) The volume of trade.

b. Represent graphically the effect of the tariff on Home’s domestic market.

c. Use the previous graph and determine the effect of the tariff on the welfare of each
of the following groups:
(i) Home import-competing producers.
(ii) Home consumers.
(iii) The Home government.

d. Use the graph from b and calculate:

(i) The terms of trade gain.
(ii) The efficiency loss.
(iii) The total effect on welfare of the tariff.

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4. Refer to the next figure and answer the following questions.

a. In the absence of trade, how many Widgets does this country produce?

b. In the absence of trade, how many Widgets does this country consume?

c. With free trade and no tariffs, what is the quantity of Widgets produced domesti-
cally?

d. With free trade and no tariffs, what is the quantity of Widgets consumed domesti-
cally?

e. With free trade and no tariffs, what is the quantity of Widgets imported?

f. With a specific tariff of $3 per unit, what is the quantity of Widgets produced
domestically?

g. With a specific tariff of $3 per unit, what is the quantity of Widgets consumed
domestically?

h. With a specific tariff of $3 per unit, what is the quantity of Widgets imported?