Assignment:
Answer all five questions in one file. Each question is worth 20 marks. Keep your answer concise. Use figures to illustrate your point wherever possible. Show all your work and attach your graphs when submitting your assignment for grading and feedback.
1. Discuss the small-country case of tariffs, using partial equilibrium analysis.
2. Suppose the free trade market price of a car is $20,000. It contains $10,000 worth of steel. The importing country imposes 25% tariff on car imports.
a. Calculate the effective rate of protection if there is no duty on steel imports.
b. Calculate the effective rate of protection if the importing country imposes a 20%
tariff on steel imports.
c. Suppose it also takes $4000 worth of copper (besides $10,000 worth of steel) to produce a car. Calculate the effective rate of protection if there is no import tariff on the imports of either steel or copper.
d. Suppose there is import duty of 20% and 15% on imports of steel and copper, respectively. Calculate the effective tariff rate.
3. Assume perfect competition. Summerland is a small country that takes world price of corn as given. Its domestic supply and demand for corn is given by the following:
Demand: D = 45 - 3P
Supply: S = 3p - 9
a. Assume initially that Summerland does not open to trade. What is the autarky equilibrium price and quantity?
b. Suppose Summerland decides to engage in trade. Determine the quantity demanded, the quantity supplied, and import given the world price of $6 per bushel of corn.
c. If the government of Summerland imposes a tariff in the amount of $1 (i.e., t=$1), what is the new domestic price? What is the amount imported?
4. Define the Leontief paradox, and discuss how Raymond Vernon's product cycle theory might help explain this paradox.
5. Write a brief explanation of each of the following terms:
a. terms-of-trade argument for protection
b. intra-industry trade
c. factor price equalization theorem