The world price of wine is Mow »he price thai would prevail in Canada in »he absence of trade.
a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for »Ik- Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.
b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harves» «here. What effec» does this shock have on the world price of wine? Using your graph and »able from part (a), show the effect on consumer surplus, producer sur
1. Mexico represents a small part of the world orange market.
a- Draw a diagram depicting the equilibrium in »he Mexican orange market without international trade. Identify tin; equilibrium price, equilibrium quantity, consumer surplus, and pmducer surplus, b. Suppose that the world orange price is below the Mexican price before trade and »ha» the Mexican orange market is now opened to trade. Identify the new equilibrium price, quanlily consumed, quantity produced domestically, and quantity imported. Also show the change in the surplus of domestic consumers and producers. Has total surplus increased or decreased?
plus, .ind total surplus in Canada. Who are the winners and losers? Is Canada as a whole better or worse off?
3. Suppose that Congress imposes a tariff on imported autos to protect the US. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show on a diagram: the change in the quantity of imports, the loss to U5. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumerscan be decomposed into three pieces: a gain to domestic producers, revenue for the government, and a deadweight loss- Use your diagram to identify these three pieces.
4. When China's clothing industry expands, the increase in world supply lowers the wortd price of clothing.
a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States.
b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic.
c- Compare your answers to parts (a) and (b). What are the similarities and what are the differences? Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain.
5. Imagine that wine-makers in the stale of Washington petitioned the state government to tax wines imported from California. They argue that this tax would both raise tax revenue for Ihe state government and raise employment in the Washington State wine industry. Do you agree with these claims? Is it a good policy?
a. Assume you are a lobbyist for timber, an established industry suffering from low-priced foreign competition. Which two or three of the five arguments do you think would be most persuasive to Ihe average member of Congress as to why he or she should support trade restrictions? Explain your reasoning.
b. Now assume you are an astute student of economics (hopefully not a hard assumption). Although all the arguments for restricting trade have their shortcomings, name the two or three arguments that seem to make the most economic sense to you. For each, describe the economic rationale for and against these arguments for trade restrictions.
7. Senator Ernest Hollings once wrote that 'consumers do »tot benefit from lower-priced imports. Glance through some mail-order catalogs and you'll see that consumers pay exactly the same price for clothing whether it is U.S.-madeor imported." Comment.
8. The nation of Text ilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs 520, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith's The Wealth of Nations while on vacation, the president divides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 4 million, while tin; number of T-shirts pn>-duced declines to 1 million.
a. Illustrate the situation just described in a graph. Your graph should show all the numbers.
b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is X base X height.)
9. China is a major producer of grains* such as wheal, corn, and rice. In 2008 the Chinese government concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.
a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.
b. How does an export tax affect domestic grain prices?
c. I low does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue?
d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
111. Consider a country that imports a good from abroad. For each of following statements, say whether it is true or false, Explain your answer.
a. "The greater the elasticity of demand, the greater the gains from trade."
b. "If demand is perfectly inelastic, there arc no gains from trade."
c. "If demand is perfectly inelastic, consumers do not benefit from trade."
11. Kawmin is a small country that produces and consumes jelly beans. The world price of jellybeans is SI per bag, and Kawmin's domestic demand and supply for jelly beans are governed by the following equations:
where P is in dollars per bag and Q is in bags of jelly beans.
a. Draw a well-labeled graph of the situation in Kawmin if the nation docs not allow trade-Calculate the following (recalling that the area of a triangle is 'A X base X height): the equilibrium price and quantity, consumer surplus, producer surplus, and total surplus.
b. Kawmin then opens the market to trade. Draw another graph to describe the new situation In tlx; jelly bean market. Calculate the equilibrium price, quantities of consumption and production, imports, consumer surplus, producer surplus, and total surplus.
c. After awhile, the Czar of Kawmin responds to the pleas of jelly bean producers by placing a SI per bag tariff on jelly bean imports. On a graph, show the effects of this tariff. Calculate the equilibrium price, quantities of consumptkm and production, imports, consumer surplus, producer surplus, government revenue, and total surplus.
d. What arv the gains from opening up trade? What arc the deadweight losses from restricting trade with the tariff? Give numerical answers.
12. Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 4(10,000 an- pnxducvd domestically and 600,000 arc imported.
a. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by $101). Draw a graph to show how this change affects the welfare of U.S. consumers and U.S. producers and how it affects total surplus in the United States.
b. After the fall in price, consumers buy 1.2 million televisions, of which 2<X>,000 arc produced domestically and 1 million an; imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction.
c. If the government responded by putting a $100 tariff on imported televisions, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of U-S. welfare? Who might support the policy?
d. Suppose »hat the fell in price is attributable not to technological advance but to a $.100 per television subsidy from the Japanese government to Japanese industry. How would this affect your analysis?
13. Consider a small country that exports steel. Suppose that a "pro-trade" government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy a ffee I the domestic price of steel, the quantity of steel produced, the quantity of steel consumed, and the quantity of steel exported? How does it affect consumer surplus, producer surplus, government revenue,and total surplus? Is it a good policy from the standpoint of economic efficiency? (Hint: The analysis of an export subsidy is similar to the analysis of a tariff.)
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