Question: P1. Let's assume there are only 2 countries that produce 2 good. More specifically, suppose that the United States (US) and the United Kingdom (UK) each have 2 units of productive resources, 1 used to produce Wine, the other Cloth. The US can produce 40 units of Wine with 1 unit of productive resources and 40 units of Cloth with 1 unit of productive resources. The UK can produce 20 units of Wine with 1 unit of productive resources and 10 units of cloth with 1 unit of productive resources. Using this information, please answer the questions below:
*Who has an absolute advantage in the production of Wine? Cloth?
*Who has a comparative advantage in the production of Wine? Cloth?
*Given specialization, what is production before trade? After trade?
*What are the gains from trade?
*What is the "range" of potential exchange rates between US and UK?
P2. Suppose that in Japan, without a tariff 10,000 cars will be sold per year at an equilibrium price of $20,000. With a $5,000 tariff, supply decreases such that 8,000 cars are produced at $22,500 per car.
*Use a supply and demand diagram to graphically illustrate the example above.
*Why is the increase in price less than the tariff?
*Who bears the burden of the tariff?
*What are government revenues from the tariff?
*What is the "dead-weight loss" associated with the tariff - i.e., the lost in Producer Surplus and Consumer Surplus?
P3. Finally, graphically explain the negative effects of quotas. How about subsidies? Label and explain results in detail.