Consider a world market with only two countries, Home and Foreign, producing and trading widgets. Home...

 

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Consider a world market with only two countries, Home and Foreign, producing and trading widgets. Home has recently imposed a tariff of $t per widget, which has changed prices, production and consumption in both countries as shown in the following table. Foreign Home no tariff tariff price $3.00 $3.50 consumption 50,000 40,000 production 10,000 S₁ imports Mo M₁ exports no tariff $3.00 Do 60,000 tariff $2.25 25,000 St Xo 25,000 Values in the price row are in dollars per widget, all other values are in number of widgets. In autarky, the price of widgets at Home would be $5.00 and in Foreign it would be $1.50. (a) Draw a diagram illustrating the effects of the imposition of the tariff by Home on prices, production and consumption in both countries and in the world market. Label all el- ements of the diagram using numbers where available, and symbols otherwise. [7 marks] (b) Calculate the values for D, S₁, S1, Mo, M₁, Xo, and t (in $ per widget), and show these values on your diagram. [7 marks] (c) Calculate the values of the changes in consumer surplus, producer surplus, government revenue, the terms-of-trade effect, and the net welfare loss or gain for each country Home and Foreign. [7 marks] (d) Show that the total deadweight loss from the diagram of the world market is equal to the sums of the deadweight losses in each country. [4 marks] Consider a world market with only two countries, Home and Foreign, producing and trading widgets. Home has recently imposed a tariff of $t per widget, which has changed prices, production and consumption in both countries as shown in the following table. Foreign Home no tariff tariff price $3.00 $3.50 consumption 50,000 40,000 production 10,000 S₁ imports Mo M₁ exports no tariff $3.00 Do 60,000 tariff $2.25 25,000 St Xo 25,000 Values in the price row are in dollars per widget, all other values are in number of widgets. In autarky, the price of widgets at Home would be $5.00 and in Foreign it would be $1.50. (a) Draw a diagram illustrating the effects of the imposition of the tariff by Home on prices, production and consumption in both countries and in the world market. Label all el- ements of the diagram using numbers where available, and symbols otherwise. [7 marks] (b) Calculate the values for D, S₁, S1, Mo, M₁, Xo, and t (in $ per widget), and show these values on your diagram. [7 marks] (c) Calculate the values of the changes in consumer surplus, producer surplus, government revenue, the terms-of-trade effect, and the net welfare loss or gain for each country Home and Foreign. [7 marks] (d) Show that the total deadweight loss from the diagram of the world market is equal to the sums of the deadweight losses in each country. [4 marks]