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part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300.

d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is 1?2 3 base 3 height, solve for deadweight loss as a function of T. Graph this relationship for T between 0 and 300. (Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.) e. The government now levies a tax on this good of $200 per unit. Is this a good policy? Why or why not? Can you propose a better policy?

1. Mexico represents a small part of the world orange market.

a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus.

b. Suppose that the world orange price is below the Mexican price before trade and that the Mexican orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity imported. Also show the change in the surplus of domestic consumers and producers. Has total surplus increased or decreased?

2. The world price of wine is below the price that would prevail in Canada in the absence of trade. a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.

b. Now suppose that an unusual shift of the

Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in Canada. Who are the winners and losers? Is Canada as a whole better or worse off?

3. Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of imports, the loss to U.S. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumers can be decomposed into three pieces: a gain to domestic producers, revenue for the government, and a deadweight loss. Use your diagram to identify these three pieces. 4. When China‘s clothing industry expands, the increase in world supply lowers the world price of clothing.

a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States.

b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic.

c. Compare your answers to parts (a) and (b). What are the similarities and what are the differences? Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain. 5. Imagine that winemakers in the state of Washington petitioned the state government to tax wines imported from California. They argue

that this tax would both raise tax revenue for the state government and raise employment in the Washington state wine industry. Do you agree with these claims? Is it a good policy? 6. Consider the arguments for restricting trade. a. Assume you are a lobbyist for timber, an established industry suffering from lowpriced foreign competition. Which two or three of the five arguments do you think would be most persuasive to the average member of Congress as to why he or she should support trade restrictions? Explain your reasoning.

b. Now assume you are an astute student of economics (hopefully not a hard assumption). Although all the arguments for restricting trade have their shortcomings, name the two or three arguments that seem to make the most economic sense to you. For each, describe the economic rationale for and against these arguments for trade restrictions.

7. Senator Ernest Hollings once wrote that ―consumers do not benefit from lower-priced imports. Glance through some mail-order catalogs and you‘ll see that consumers pay exactly the same price for clothing whether it is U.S.-made or imported.‖ Comment.

8. The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith‘s The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million.

a. Illustrate the situation just described in a graph. Your graph should show all the numbers.

b. Calculate the change in consumer surplus, producer surplus, and total surplus that

results from opening up trade. (Hint: Recall that the area of a triangle is ? × base × height.)

9. China is a major producer of grains, such as wheat, corn, and rice. In 2008 the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.

a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.

b. How does an export tax affect domestic grain prices?

c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue? d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?

10. Consider a country that imports a good from abroad. For each of following statements, say whether it is true or false. Explain your answer. a. ―The greater the elasticity of demand, the greater the gains from trade.‖

b. ―If demand is perfectly inelastic, there are no gains from trade.‖

c. ―If demand is perfectly inelastic, consumers do not benefit from trade.‖

11. Kawmin is a small country that produces and consumes jelly beans. The world price of jelly beans is $1 per bag, and Kawmin‘s domestic demand and supply for jelly beans are governed by the following equations:

Demand: QD 5 8 – P Supply: QS 5 P,

where P is in dollars per bag and Q is in bags of jelly beans.

a. Draw a well-labeled graph of the situation in Kawmin if the nation does not allow trade. Calculate the following (recalling that the area of a triangle is ? 3 base 3 height): the equilibrium price and quantity, consumer surplus, producer surplus, and total surplus.