1. Home’s demand curve for wheat is
D = 100 – 20P
Its supply curve is
S = 20 + 20P
Derive and graph Home’s import demand schedule. What would the price of wheat be in the absence of trade?
2. Now add Foreign, which has a demand curve
D* = 80 – 20P
And a supply curve
S* = 40 + 20P
a. Derive and graph Foreign’s export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.
b. Now allow Foreign and Home 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?
3. 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 Home; (2) the quantity of wheat supplied and demanded in Home; (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; (3) 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.