ECOS 3006 - A small country’s demand curve

1?A small country’s demand curve is given by Q=10-(P/2) and its supply curve is given by Q=P- 5. Assume the world is currently in free trade and that the price under free trade is $7. What is the size of the import quota that, when introduced, would be equivalent (i.e. have the same impact on price and quantity) to the introduction of a $2 specific import tariff?

a. 1.5

b.5

c. 4.5

d.3

2?Consider two identical countries, Home and Foreign. Each country consists of one firm (a monopoly). Each monopoly faces a demand curve in each market of P=10-Q, where Q=qH+qF; qH and qF are the outputs of the Home and Foreign monopoly respectively. In each country, the firms face marginal cost of $2 per unit produced. Assume there are no fixed costs and that the transport cost is equal to $1 per unit sold overseas. Assume that the Home and Foreign markets are segmented. The change in total welfare resulting from a move from autarky to free trade is

a. +4.5

b. -9

c. +1.5

d. -3