International Finance

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Question description

Assume a large world economy with several countries. There is a good that can be produced domestically by every country in the absence of trade. Suppose Country 1 has the following demand and supply curves for this good: D1 = 28 − 2P and S1 = 2P − 4. For the rest of the world (without Country 1) demand and supply curves are Dw−1 = 500 − 25P and Sw−1 = 100P . Answer the following questions (where necessary, round to two decimal places). (a)  If Country 1 initially does not trade with the rest of the world, what are its equilibrium price and quantity? (b)  Find consumer surplus for Country 1 when it does not trade. (c)  Show why Country 1 will become an importer of the good, once we allow international trade. (d)  With free international trade what are the world price and quantity Country 1 imports? (e)  After intensive lobbying efforts domestic producers in Country 1 get some protection in a form of $1.00 tariff. What are the domestic price in Country 1 and price on the world market? (f)  How do imports of Country 1 change? By how much? (g)  By how much does consumer surplus change as a result of tariff? (h)  What is the net effect of the tariff on Country 1? (i)  Would you recommend for Country 1 to repeal the tariff? Why or why not? 

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(Top Tutor) Daniel C.
School: UC Berkeley
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