Question 1: ?True/False

For each of the following statements say whether it is true or false and explain why using a couple?of sentences, graphs or equations.

(a) If the domestic market is served only by a foreign monopoly and the pass-through rate of a?tariff is greater than one, then imposing a tariff will lead to welfare losses for a country.

(b) If marginal cost of serving two markets is identical, then an internationally discriminating?monopolist would set the same price in both markets.

Question 2: Export Tariff in a Large Country

Argentina is a large country exporting soybeans. Both the demand and the supply curves in?Argentina are linear. With free trade Argentina exports 90 tonnes of soybeans. Now suppose that?its cash-strapped government introduces an export tariff of $11 per tonne of soybeans, i.e., producers?of soybeans are taxed $11 per each tonne they sell abroad (you can think of it as a negative export?subsidy). As a result the world price of soybeans increases by $2/tonne and Argentine exports fall?to 60 tonnes.?[Please justify your answers with appropriate graphs and calculations.]

(a) What impact does the export tariff have on the price of soybeans on the Argentine market?

(b) What is the revenue from the export tariff?

(c) What is the total deadweight loss caused by the tariff?

(d) Does Argentina gain or lose overall from imposing the tariff?

Question 3: Trade Creation and Trade Diversion

Consider three countries: A, B and C. Producers in country i have a constant marginal cost Ci of?producing oil, with CA > CB > CC. The oil market is perfectly competitive. Country A initially?applies a common MFN tariff t to oil from both B and C. Throughout this question focus on the?effects of potential regional trade agreements (RTAs) on the home market in country A.

(a) Suppose A and B form an RTA. Could this RTA lead to trade creation? If yes, under what?circumstances?

(b) Suppose A and C form an RTA. Could this RTA lead to trade diversion? If yes, under what?circumstances?

Now suppose that country A does not produce oil at all and that demand for oil in A is linear.

(c) Illustrate a case of trade diversion in which A loses from forming an RTA.

(d) Illustrate a case of trade diversion in which A nevertheless gains from forming an RTA.

Problem Set 6
Econ 355 – Introduction to International Trade
2015-2016 Winter Term 2
Due Thursday April 7th 2016 before the start of class

1

True/False

For each of the following statements say whether it is true or false and explain why using a couple
of sentences, graphs or equations.
(a) If the domestic market is served only by a foreign monopoly and the pass-through rate of a
tari? is greater than one, then imposing a tari? will lead to welfare losses for a country.
(b) If marginal cost of serving two markets is identical, then an internationally discriminating
monopolist would set the same price in both markets.

2

Export Tari? in a Large Country

Argentina is a large country exporting soybeans. Both the demand and the supply curves in
Argentina are linear. With free trade Argentina exports 90 tonnes of soybeans. Now suppose that
its cash-strapped government introduces an export tari? of $11 per tonne of soybeans, i.e., producers
of soybeans are taxed $11 per each tonne they sell abroad (you can think of it as a negative export
subsidy). As a result the world price of soybeans increases by $2/tonne and Argentine exports fall
to 60 tonnes. [Please justify your answers with appropriate graphs and calculations.] (a) What impact does the export tari? have on the price of soybeans on the Argentine market?
(b) What is the revenue from the export tari??
(c) What is the total deadweight loss caused by the tari??
(d) Does Argentina gain or lose overall from imposing the tari??

3

Trade Creation and Trade Diversion

Consider three countries: A, B and C. Producers in country i have a constant marginal cost Ci of
producing oil, with CA > CB > CC . The oil market is perfectly competitive. Country A initially
applies a common MFN tari? t to oil from both B and C. Throughout this question focus on the
e?ects of potential regional trade agreements (RTAs) on the home market in country A.
(a) Suppose A and B form an RTA. Could this RTA lead to trade creation? If yes, under what
circumstances?
(b) Suppose A and C form an RTA. Could this RTA lead to trade diversion? If yes, under what
circumstances?
Now suppose that country A does not produce oil at all and that demand for oil in A is linear.
(c) Illustrate a case of trade diversion in which A loses from forming an RTA.
(d) Illustrate a case of trade diversion in which A nevertheless gains from forming an RTA.
1