Chapter 9.Exercises 1-6. Application:International trade. Principles of Economics

1. The united states represents a small part of the world orange market. A. Draw a diagram depicting the equilibrium in the U.S. 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 U.S. price before trade. Identify the new equilibrium Price, quantity produced domestically, and quantity imported. Also show the change in the surplus of domestic consumers and producers. Has domestic total surplus. Has domestic total surplus increased or decreased? 2. The world Price of wine is below the Price that would prevail in the United States in the absence of trade.A. Assuming that American imports of wine are a small part of total world wine production, draw a graph for the U.S. market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in a appropiate 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 surplusnin the United States. Who are the winners and losers? Is the United States as a whole better or worse off? 3. The world Price of cotton is below the no-trade Price in Country A and above the no trade Price in country B. Using supply-and-demand diagrams and welfare tables such as those in the chapter, show the gains from trade in each country. Compare your results for the two countries. 4. Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the U.S. is a Price taker in the world auto market, show 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 transfer to domestic producers, a transfer to the government, and a deadweight lost. Use your diagram to identify these three pieces. 5. According to an article in The New York Times (Nov. 5, 1993), “many Midwest wheat farmers oppose the [North America] free trade agreement [NAFTA] as much as many corn farmers support it. “For simplicity, asume that the United States is a small country in the markets for both corn and wheat, and that without the free trade agreement, the United States would not trade these commodities internationally. (Both of these assumptions are false, but they do not affect the qualitative responses to the following questions.).A. Based on this report, do you think the world wheat Price is above or below the U.S. no-trade wheat Price? Do you think the world corn Price is above or below the U.S. no-trade corn Price? Now analyze the welfare consequences of NAFTA in both markets. b. Considering both markets together, does NAFTA make U.S. farmers as a group better or worse off? Does it take U.S. consumers as a group better better or worse off? Does it make the United States as a whole better or worse off? 6. 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?