The Netherlands is about to join Denmark in a free trade area. Before the union, The Netherlands imports 10 million DVD recorders from the rest of the world at $100 and adds a tariff of $30 on each recorder. It takes $110 to produce a DVD recorder in Denmark.
a. Once the free trade area is formed, what will be the cost to The Netherlands of the DVD recorder trade diverted to Denmark?
b. How much extra imports would have to be demanded by The Netherlands to offset the trade-diversion cost?