Q3 (20 points) Suppose there are three countries, the U.S., Mexico, and Asia, in the world and the U.S. imports automobiles from either Mexico or Asia (or both). Assume that Mexico is a small supplier and Asia is a large supplier and the free-trade prices of automobiles from Mexico and Asia are P_MEXICO=$12,000 and P_ASIA=$10,000, respectively, and the U.S. initially imposes a 15% tariff on both Mexico and Asia. Now the U.S. forms an FTA with Mexico.

(a)Use a graph of import demand and export supply curves to show the impact of this FTA on U.S. consumer surplus, government revenue, and welfare. Is the U.S. better off or worse off with the FTA?

(b)Show the impact of an alternative FTA with Asia on U.S. consumer surplus, government revenue, and welfare. Is the U.S. better off or worse off with the FTA

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