1. Small country tariff  Demand function for sugar in Canada is given P = 20 - 2Q and supply function is given by

P = 4 + 2Q. World price of sugar is P* = 6.

a) Calculate equilibrium price and quantity if there is no trade. Calculate producer and consumer surplus.

b) Now suppose Canada can freely export/import sugar. Calculate the production of sugar in Canada. Calculate the consumption of sugar in Canada. Does Canada export or import sugar? How many units?

c) Calculate producer and consumer surplus under free trade. Does the country benefit from free trade?

d) Suppose the government imposes a tariff of 1 per unit of imported good. Calculate (i) new domestic production of sugar, (ii) new consumption of sugar, (iii) new amount of import and

(iv) tariff revenues.

2. Large country tariff

a) In 2002 the United States introduced tariffs on certain steel imports from China and Europe. One can argue that in some cases, the introduction of these tariffs improved welfare in the United States. Why?

b) Use your answer to part a) to explain why president George W. Bush suspended the U.S. tariffs on steel 17 months ahead of schedule.

3. Quantitative restrictions

a) List 3 ways in which rents from quantitative restrictions can be allocated. In which case is the quantitative restriction most harmful for the importing country?

b) When the Multifibre Agreement (MFA) expired in 2005, the quality of T-shirts imported from China declined. Why?

c) Suppose that in Question 1, the government rather than using a tariff, decides to limit the quantity of imports to 4. All the quota licenses are given to the nephew of the minister of finance (no rent seeking). Show on a new graph the outcome of that policy, i.e. show changes in consumer surplus, producer surplus and mark the quota rents.

d) From the point of view of the aggregate welfare of the country - is the outcome worse than the tariff? (aggregate welfare is the sum of consumer surplus, producer surplus, tariff revenues and quota rents)