Consider the following two-country model of the market for spinach. All producers and consumers take the price of spinach as given. Home's supply curve for spinach is given by
SH = 5 + P,
where sH is the quantity supplied by Home producers in millions of tons and P is the price in dollars per ton. Home's demand curve is given by:
DH = 100 - P,
where DH is the quantity demanded in Home. Foreign's supply and demand curve are given by:
SF = 2P
DF = 100 - P,
respectively.
(a) Derive the Home import demand curve and the Foreign export supply curve for spinach, and use them to find the free-trade equilibrium, including the world price of spinach and the quantity traded. Draw a diagram that shows this equilibrium.
(b) Now, assume that Home imposes a $5 per ton import tariff. Show diagrammatically how this shifts the import demand curve and changes the equilibrium. Compute the new world price and domestic price for spinach in Home.
(c) Does the tariff raise or lower Home's welfare? Show your calculations.