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nAnswers to Textbook Problems
1. The import demand equation, MD, is found by subtracting the home supply equation from the Home
2. a. Foreign’s export supply curve, XS, is XS 40 40 P. In the absence of trade, the price is 1.
b. When trade occurs, export supply is equal to import demand, XS MD. Thus, using the equations
3. a. The new MD curve is 80 40 (P t) where t is the specific tariff rate, equal to 0.5. (Note: In
solving these problems, you should be careful about whether a specific tariff or ad valorem tariff
is imposed. With an ad valorem tariff, the MD equation would be expressed as MD 80 40
(1 t)P.) The equation for the export supply curve by the foreign country is unchanged.
MD XS
b. and c. The welfare of the Home country is best studied using the combined numerical and
graphical solutions presented below in Figure 9-1.
Chapter 9 The Instruments of Trade Policy 43
Figure 9-1
where the areas in the figure are:
4. Using the same solution methodology as in Problem 3, when the Home country is very small
relative to the Foreign country, its effects on the terms of trade are expected to be much less. The
small country is much more likely to be hurt by its imposition of a tariff. Indeed, this intuition is
shown in this problem. The free trade equilibrium is now at the price $1.09 and the trade volume
is now 36.40.
With the imposition of a tariff of 0.5 by Home, the new world price is $1.045, the internal Home price is
$1.545, Home demand is 69.10 units, Home supply is 50.90, and the volume of trade is 18.20. When
Home is relatively small, the effect of a tariff on world price is smaller than when Home is relatively
5. The effective rate of protection (ERP) is defined as (Vt Vw)/Vw, where Vt is the value added under
protection and Vw is the value added under free trade. We define value added as the difference between
Chapter 9 The Instruments of Trade Policy 44
6. The effective rate of protection takes into consideration the costs of imported intermediate goods.
7. We first use Foreign’s export supply and Home’s import demand curves to determine the new
world price. The Foreign supply of exports curve, with a Foreign subsidy of 0.5 per unit, becomes
XS 40 40(1 0.5) P. The equilibrium world price is 1.2 and the internal Foreign price is 1.8.
8. a. False, unemployment has more to do with labor market issues and the business cycle than with
tariff policy. Empirical estimates suggest that the cost to society of jobs saved through tariffs is
exorbitantly high and tariffs may actually increase unemployment in nonprotected industries.
9. At a price of $10 per bag of peanuts, Acirema imports 200 bags of peanuts. A quota limiting the
import of peanuts to 50 bags has the following effects:
a. Set MD 50 to find the post-quota price: 350 15P 50. The price of peanuts rises to $20 per
bag.
Chapter 9 The Instruments of Trade Policy 45
10. The reason is largely that the benefits of these policies accrue to a small group of people and the
costs are spread out over many people. Thus, those that benefit care far more deeply about these
11. It would improve the income distribution within the economy since wages in manufacturing
would increase, and real incomes for others in the economy would decrease due to higher prices
