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# Problem I. Demand and supply curves for two large countries are given by figure 1. Answer the following questions. 1. Consider the autarky situation. (a) Calculate CS, PS, GS, and TS for both...

Problem I. Demand and supply curves for two large countries are given by figure 1. Answer the following questions.
1. Consider the autarky situation.
(a) Calculate CS, PS, GS, and TS for both countries. (3 points)
2. Now, suppose countries open to trade.
(a) Which country imports and which exports? (0.5 point)
(b) Derive import demand for importer and export supply for exporter. You can either draw both curves with appropriate labeling and placing numbers or write equations. (2 points)
(c) Find the new equili
ium price, trade quantity, and consumption as well as production in each country. (2 points)
(d) Calculate CS, PS, GS, and TS in both countries. Which country gains? How big are the gains? (4 points)
3. Now, suppose the importing country government wants to protect domestic producers. To do so, it imposes specific import tariff equal to \$2 per physical unit of the imported good.
(a) Find the new equili
ium prices, trade quantity, and consumption as well as production in each country. (2.5 points)
(b) Calculate CS, PS, GS, and TS for each country. How big are the gains/losses for each country relative to free trade? How does the world's total welfare change? (5 points)
4. Now, consider a case where the importer does not impose any tariff but the exporting country enforces specific export tax equal to \$2 per physical unit of the exported good.
(a) Find the new equili
ium prices, trade quantity, and consumption as well as production in each country. (2.5 points)
(b) Calculate CS, PS, GS, and TS for each country. How big are the gains/losses for each country relative to free trade? How does the world's total welfare change? (5 points)
5. Now suppose the case with both import tariff and export tax each equal to \$2 per physical unit.
(a) Find the new equili
ium prices, trade quantity, and consumption as well as production in each country. (2.5 points)
(b) Calculate CS, PS, GS, and TS for each country. How big are the gains/losses for each country relative to free trade? How does the world's total welfare change? (5 points)
6. Now consider the game where each country has two actions: protection or free trade. Given the wel-fare outcomes you derived above and assuming that each government wants to maximize total surplus in its country, find the Nash equili
ium of this game. Make sure you clearly draw the two by two game first with proper outcome numbers from your calculations above. What policy lesson do we get from this practice? (4 points)
Answered Same Day Jul 29, 2021

## Solution

Komalavalli answered on Jul 30 2021
Country A :
Consumer surplus (CS) = ½ *(50-40)*(6000-0)
Consumer surplus for country A = ½* (10) *(6000) = 30000
Consumer surplus for country A is \$30,000
Producer surplus (PS) = ½ *(40-10)*(6000-0)
Producer surplus for country A = ½ * (30) (6000) = 90000
Producer surplus for country A is \$90,000
Total surplus (TS) = Consumer surplus + producer surplus
Total surplus of Country A = 30,000+90,000 = 120,000
Total surplus of Country A is 120,000.
Country B:
Consumer surplus (CS) = ½ *(40-30)*(4000-0)
Consumer surplus for country B = ½* (10) *(4000) = 20000
Consumer surplus for country B is \$20,000
Producer surplus (PS) = ½ *(30-20)*(4000-0)
Producer surplus for country B = ½ * (10) (4000) = 20000
Producer surplus for country B is \$20,000
Total surplus (TS) = Consumer surplus + producer surplus
Total surplus of Country B = 20,000+20,000 = 40,000
Total surplus of Country B is 40,000
Government surplus for both countries is zero because there is no tax implemented in both nations.
2.
a) Country A will import and Country B will export.
) Country A Demand and supply equation
QDA = 30,000 – 600P
QSA = -2000+200P
Country B Demand and supply equation
QDB= 16,000 – 400P
QSB = -8,000 + 400P
When both countries open their trade, they will engage in trade at price \$35
Country A Demand and supply at \$35
Quantity demanded by country A at \$35
=30,000-600*35
=9000
Quantity supplied by domestic market in country A at \$35
=-2000+200*35
=5000
At \$35 there is an excess demand of 4000 quantity in country A, so Country A will import this 4000 quantity from country B
Country B Demand and supply at \$35
Quantity demanded by country B =16,000 – 400*35
=2000
Quantity demanded by country B at \$35 is 2000
Quantity supplied by domestic market in country B at \$35
=-8,000 + 400*35
=6000
At \$35 there is an excess supply of 4000 quantity in country B; So Country B will export this 4000 quantity to country A
(c)
New equili
ium price at country A and Country B is \$35
Country A Demand and supply at \$35
Quantity demanded by country A at \$35
=30,000-600*35
=9000
Quantity supplied by domestic market in country A at \$35
=-2000+200*35
=5000
Country A quantity demand for a good at \$35 is 9000 and Country A produces 5000 quantity of good at trade price \$35.
Country B Demand and supply at \$35
Quantity demanded by country B =16,000 – 400*35
=2000
Quantity demanded by country B at \$35 is 2000
Quantity supplied by domestic market in country B at \$35
=-8,000 + 400*35
=6000
Country B quantity demand for a good at \$35 is 2000 and Country B produces 6000 quantity of good at trade price \$35
Country A :
Consumer surplus (CS) = ½ *(50-35)*(9000-0)
Consumer surplus for country A = ½* (15) *(9000) = 67,500
Consumer surplus for country A is \$67,500
Producer surplus (PS) = ½ *(35-10)*(5000-0)
Producer surplus for country A = ½ * (25) (5000) = 62,500
Producer surplus for country A is \$62,500
Total surplus (TS) = Consumer surplus + producer surplus
Total surplus of Country A = 67,500+62,500 = 130,000
Total surplus of Country A is 130,000.
Country B:
Consumer surplus (CS) = ½ *(40-35)*(2000-0)
Consumer surplus for country B = ½* (5) *(2000) = 5000
Consumer surplus for country Bis \$5000
Producer surplus (PS) = ½ *(35-20)*(6000-0)
Producer surplus for country B = ½ * (15) (6000) = 45000
Producer surplus for country B...
SOLUTION.PDF