EXERCISE SET 3
Tariffs: A Partial Equilibrium Analysis

I. Objectives
  1. To obtain the price of a good in autarky
  2. To obtain the import volume under free trade
  3. To obtain the import volume under tariffs
  4. To obtain the effect of trade policy on welfare
II. Model
III. Exogenous variables
IV. Autarky

Click on Gimme Autarky! to obtain the autarkic price and quantity.

V. Free trade and restricted trade

  1. Select a value for the world price (or free-trade price).
    Note: This should be less than the autarkic price! (Why?)
      PW =

       

  2. Select a value for the specific tariff.
    Note: t should not be too large. The tariff-ridden price should not exceed the autarkic price. (Why?)
      t =

       

  3. Click on Gimme Imports! to obtain import volume.
      Import volume =

VI. Questions

Select suitable values for the parameters:

a1 = ________, a2 = ________, b1 = ________, b2 = ________.

  1. Sketch the demand and supply curves.

  2. Obtain the autarkic price and quantity. Show calculations.

  3. Consider the situation under free trade.
    1. Select a world price.
    2. Obtain the quantity demanded by consumers, quantity supplied by domestic firms, and the import volume.
    3. Obtain the values for consumer surplus (CS) and producer surplus (PS).
    4. Show all these on the graph. Show all calculations.

  4. Suppose the government imposes an import tariff.
    1. Select a suitable value for t.
    2. Obtain the quantity demanded by consumers, quantity supplied by domestic firms, and the import volume.
    3. Obtain CS, PS and tariff revenue (R).
    4. Show these on the graph. Show calculations.

  5. As a result of the tariff, the country's welfare has [ increased | decreased | remained unchanged ]. Explain. Indicate the change in welfare on the graph.
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