ECON 3600 International Trade No credit will be given for unjustified answers 1. Note: The production functions, factor endowments and preferences are exactly thesame as those in question 2 of...

ECON 3600 International Trade No credit will be given for unjustified answers 1. Note: The production functions, factor endowments and preferences are exactly thesame as those in question 2 of homework assignment 2. Feel free to use the solutionsfrom assignment 2 to give you a sense of the autarkic and free trade equilibrium.Consider an open economy with two industries: agriculture and automobiles. Thereare two countries, H and F . Both countries use capital and labor to produce bothtypes of goods. The technology for automobiles is given by the following Leontiefproduction function:LX KXX = FX (KX , LX ) = min,.73The technology for agriculture is similarly described by a Leontief production function:LY KYY = FY (KY , LY ) = min.2 8Firms earn zero profits in all industries so that price equals unit cost in all industries.There are two consumers in country H, consumer 1 and consumer 2. Consumer1 has a labor supply of 10 and no capital while consumer 2 has no labor supply anda capital supply of 30. There is a single consumer in country F . This consumer hasa labor supply of 10 and a capital supply of 20. All three consumers have the sameutility function given byU (X, Y ) = X 1/5 Y 4/5 .(a) (10 points) Suppose that country H unilaterally imposes an ad-valorem tariff,? = 0.1, on it’s imports from country F . Assume further that all tariff revenuesare redistributed to consumers. How does this affect the equilibrium prices incountry F and country H.(b) (10 points) Compute each consumer’s utility level in after the tariff is imposed.Assume that each consumer gets half of the tariff revenue in country H.(c) (10 points) Using your answers from (b) determine who gains and who loses fromthe imposition of the tariff. Provide intuition for your answers. 1 2. Suppose there are two countries: France and Spain. Each country can make twogoods: wine, W , or cloth, C. One unit of labor is required to make one unit of W .The first unit of cloth requires 3 workers. After that, each additional unit of C requires1 worker. France has 6 workers whereas Spain has 8. Consumers in each country haveidentical preferencesU (W, C) = W 1/3 C 2/3 .(a) (10 points) Draw each country’s autarkic PPF. Calculate the autarkic equilibrium(relative price of good C and the quantity produced of each good) in each country.(b) (10 points) Suppose France and Spain trade. Describe an equilibrium in whichFrance completely specializes in the production of C. What is the free traderelative price and the pattern of trade. Who gains and who loses from trade?(c) (Bonus Question: 10 points) Suppose U (W C) = W C. Find another possibleequilibrium. 2