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Question: b open economy 35 points 7714 and 7 points...

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B - Open Economy (35 points: 7,7,14 and 7 points for questions 4,5,6 and 7, respectively):

 

For the following questions, we assume that Veganstan’s policy makers open up the country’s economy for trade. Veganstan’s neighbouring country, Beefland, can produce and sell unlimited quantities of broccoli at 0.5$ per kilogram – which happens to be also the world price PW for broccoli.

 

4: Assume that there is free trade between Veganstan and Beefland. For Veganstan:           
 

a)     graphically show the free trade equilibrium price PFT and quantity QFT; [1]

b)     briefly discuss how PFT and QFT compare to PCE and QCE;

c)     discuss the welfare implications[2] of free trade relative to the closed economy.

 

5: Assume that while allowing trade with Beefland, Veganstan’s policy makers place a tariff of 0.5$ per kg on all broccoli imported from Beefland. For Veganstan:                                              

a)     graphically show the post tariff equilibrium price PT and quantity QT;

b)     briefly discuss how PT and QT compare to PFT and QFT;

c)     discuss the welfare implications of the tariff relative to free trade.

 

6: Assume that while allowing for free trade with Beefland, Veganstan’s policy makers decide to give to all broccoli producers in Veganstan a subsidy of 0.5 $ per kg produced. For Veganstan: 

 

a)     graphically show the post subsidy equilibrium price PS and quantity QS;

b)     briefly discuss how PS and QS compare to PFT and QFT;

c)     discuss the effect of the subsidy on the quantity of broccoli that is being supplied domestically, as well as on the quantity that is being imported from Beefland;

d)     discuss the welfare implications of the subsidy relative to free trade.

 

7: For this question only, we assume that cauliflower is a substitute for broccoli.                  
 

[1] Both demand and supply are expressed in kilograms (kg), and all prices are in dollars ($).

[1] By “graphically show”, we mean that you should use the demand and supply graph/diagram analisys.

 

[1] Recall that by “welfare implications” we mean: consumer surplus, producer surplus, deadweight loss, and overall welfare (including e.g. tax revenue or subsidy costs, if relevant).

 

Beefland can produce virtually unlimited quantities of cauliflower at a lower price than Vegastan; furthermore, Beefland’s production price for cauliflower coincides with the world price for it.

 

Assume that we start from a situation where there is free trade between Veganstan and Beefland in both the broccoli and cauliflower markets, but then Veganstan’s policy makers introduce a tariff of 0.5$ per kilogram on all of the broccoli that is being imported from Beefland.

Discuss the effect that you would expect the tariff on broccoli to have on Veganstan’s equilibrium price and quantity in the cauliflower market.

 

 

 

 
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