Consider a country "Home". Assume that Home’s demand and supply of coffee can be represented as follows: QD=200‐40p QS=40+40p a) Derive Home’s import demand curve and find the price of coffee in the absence of trade. Then add the foreign country „Foreign". Assume that Foreign’s demand and supply of coffee can be represented as follows: Q*D=160‐40p Q*S=80+40p Derive Foreign’s export supply curve and find the price of coffee that would prevail in Foreign in the absence of trade. (6 P)
Now assume that Foreign and Home agree to allow free trade with each other. Find and graph the equilibrium under free trade if transaction costs are absent. What is the world price? What is the volume of trade? (12 P) Assume that Home imposes a specific tariff of 0.5 per unit on the import of coffee. Determine the effects of the tariff on the following a) the price of coffee in each country b) the quantity of coffee demanded and supplied in each country c) the volume of trade. (6 P).
