1. Home's demand curve for wheat is D = 100 - 20P and its supply curve is S = 20 + 20P. Foreign's demand curve for wheat is D* = 80 - 20P and its supply curve is S* = 40 + 20P.
a. Derive and graph Home's import demand schedule. What would the price of wheat be in the absence of trade?
b. Derive and graph Foreign's export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.
c. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade?
2. Home imposes a specific tariff of 0.5 on wheat imports.
a. Determine and graph the effects of the tariff on the following: (1) the price of wheat in each country; (2) the quantity of wheat supplied and demanded in each country; (3) the volume of trade.
b. Determine the effect of the tariff on the welfare of each of the following groups: (1) Home import-competing producers; (2) Home consumers; the Home government.
c. Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.
3. Suppose that Foreign had been a much larger country, with domestic demand D* = 800 - 200P and S* = 400 + 200P. Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff by Home. Relate the difference in results to the discussion of the small country case in the text.
4. The nation of Acirema is "small" and unable to affect world prices. It imports peanuts at the price of $10 per bag. The demand curve is D = 400 - 10P and the supply curve is S = 50 + 5P. Determine the free trade equilibrium. Then calculate and graph the following effects of an import quota that limits imports to 50 bags.
a. The increase in the domestic price.
b. The quota rents.
c. The consumption distortion loss.
d. The production distortion loss.
5. If tariffs, quotas, and subsidies each cause net welfare losses, why are they so common, especially in agriculture, among the industrialized countries such as the United States and the members of the European Union?