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ECON 475v6 Assignment 2F

Answer all five questions in one file. Each question is worth 20 marks. Keep your answer concise. Use figures to illustrate your point wherever possible. Show all your work and attach your graphs when submitting your assignment for grading and feedback.

1.  Assume perfect competition. Saleland is a small country that takes world price of corn as given. Its domestic supply and demand for corn is given by the following:

Demand: D = 45 – 3P

Supply: S = 3p – 9

a.  Assume initially that Saleland does not open to trade. What is the autarky equilibrium price and quantity?b.  Suppose Saleland decides to engage in trade. Determine the quantity demanded, the quantity supplied, and import given the world price of $6 per bushel of corn.

c. If the government of Saleland imposes a tariff in the amount of $1 (i.e., t=$1), what is the new domestic price? What is the amount imported?

2.  Describe in detail how the concept of demand reversal affects the implications predictions of the Heckscher-Ohlin model.

3.  Briefly describe the Linder theory. What would this theory suggest about the prospects developing countries have for exporting goods to developed countries? Do you think this is a realistic suggestion? Why or why not?

4.  Explain how the Krugman model of trade works. Explain the similarities and differences between the Krugman model and Heckscher-Ohlin model.

5.  Using a general equilibrium approach, point out the real income loss from a tariff to a country. What is the consumer welfare loss? Why might consumers prefer a production subsidy rather than a tariff?

 


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