The following table shows the bushels of corn and kgs of beef that Mainland and Wishland can produce per day when they use all their resources efficiently.
=ELMO
Mainland 240 120
Wishland 400 320
(a) Identify the commodity in which Mainland and Wishland have absolute advantage in. Identify the commodity in which Mainland and Wishland have comparative advantage in. (b) Indicate whether or not trade is possible and the basis for trade if possible. What is the range for the terms of trade for mutually beneficial trade if possible? i. Would it be good for Mainland to exchange 20 bushels of corn for 20 kgs of beef with Wishland and would Wishland agree? ii. Would it be good for Mainland to exchange 60 bushels of corn for 42 kgs of beef with Wishland and would Wishland agree? iii. Would it be good for Mainland to exchange 80 bushels of corn for 36 kgs of beef with Wishland and would Wishland agree? (c) If trade between nations is so beneficial, why don’t we see complete specialization and why are free trade agreements so controversial?
6. In Tessland, suppose the domestic demand curve for sugar is given by: P = 16 — 0.05Q and the domestic supply curve is given by: P = 4 + 0.05Q.
(a) In the absence of any trade, what is the equilibrium price and quantity of sugar? How much are the consumer surplus and domestic producer surplus? (b) Suppose the equilibrium price of sugar in the world market is P = 6. How much are the new consumer surplus and new domestic producer surplus?
(c) What is a tariff in international trade? Suppose Tessland’s government imposes tariff $2 per unit (a ton) of sugar.
i. What will be the new effective price in the domestic market?
ii. As a result, how much are the change in consumer surplus and change in domestic producer surplus compared to(ii)?
iii. How is the loss in consumer surplus redistributed between domestic producer surplus, foreign producer surplus, government’s revenue resulting from tariff and dead-weight loss to the society?
