1. Home’s demand curve for wheat isD = 100 – 20P.Its supply curve is5 = 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 curveand a supply curveD* = 80 – 20P,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 to 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?4. Suppose that Foreign had been a much larger country, with domestic demandD* = 800 – 200P, 5* = 400 + 200P.(Notice that this implies that the Foreign price of wheat in the absence of trade would have been the same as in problem 2.)Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff by Home. Relate the difference in results to the discussion of the “small country” case in the text.

Leave a Reply