2. Suppose that US market demand and supply for cloth are given, respectively, by the following algebraic equations: P = 8 – ½Q and P = 2 + ¼Q (P is given in dollars and Q in tons).
a) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth in the US in the absence of [international] trade.
b) If the US now allows free trade and P=$2.00 on the world market and we assume no transportation costs, how much cloth will the US consume, produce and import with free trade?
c) Now assume the US imposes a tariff of 50% on the world price, how much cloth will the US consume, produce and import with tariff?
d) How much tax revenues will the US government collect with trade restrictions?
e) How much is the consumer loss as a result of the tariff?
f) How much are the producer’s gains and the society loss (deadweight loss) as a result of the tariff?
g) The benefits of trade liberalization are assumed to be great. Yet, Nations restrict International Trade. Why do they do that? Discuss.