Suppose Foreign had been a much larger country, with domestic demand                                 (Notice that this implies the Foreign price of wheat in the absence of trade would have been the...

Suppose Foreign had been a much larger country, with domestic demand

(Notice that this implies the Foreign price of wheat in the absence of trade would have been the same as in problem 2.)

Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff by Home. Relate the difference in results to the discussion of the small country case in the text.

problem 2

Now add Foreign, which has a demand curve

and a supply curve

a. Derive and graph Foreign’s export supply curve and find the price of wheat that would prevail in Foreign in the absence of trade.

b. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price? What is the volume of trade?