Assignment
1. Draw a conventional supply and demand diagram to illustrate the gains from trade between two countries for a particular commodity (say, sugar). Be sure to label your axes and curves and relevant areas on the diagram clearly and carefully. In the light of your diagram, answer the following questions:
a. Which country has a comparative advantage in sugar?
b. Do both countries gain from tradein sugar?
c. Does anyone in either country lose from trade in sugar?
d. Name two real-world factors that influence potential gains from tradein sugar that have not been included in your model?
2. Draw a supply and demand diagram to illustrate the economic consequences of the U.S. tobacco policy as it existed prior to 2004. For the purposes of the question assume a freely transferable output quota, which was given to producers by the government. Show the effects of eliminating the policy on quantity produced, consumed, and traded. Show the sign and size of the effects on welfare of producers, consumers, taxpayers, and foreigners in terms of areas on your figure.
3.
a. What were the effects of the tobacco program on total U.S. welfare? Explain this "surprising" result.
b. Who paid the cost of supporting producer prices under the U.S. tobacco program? Who benefited?
c. What were the implications of the tobacco program for cigarette consumption?
d. What was the effect on U.S. tobacco quality and yields when acreage allotments were introduced in the 1930s? Why did this happen?
e. What was the effect of the shift from acreage allotments to poundage quotas in 1965 on U.S. tobacco quality and yields? Why did this happen?
f. The world tobacco and cigarette industry evolved in response to the U.S. tobacco program. What was the effect of this evolution on the U.S. share of the world tobacco market? How did U.S. benefits and costs of the tobacco program change as a result of this evolution?