Plot how welfare change with Demand and Supply Assessment
- Country :
Use the spreadsheet "ch_7_template.xls" to answer the following questions. The spreadsheet allows you to plot how welfare changes with a change in tariffs for an importing country under a range of as- sumptions. The first few columns show the parameters for demand and supply for a commodity pro- duced by two countries, Home and Foreign, as well as welfare weights for producer and consumer surplus and tariff revenue and some additional policies. You can change these settings. Column K gives a range of possible values for Home's tariff, and the following columns allow you to calculate the equilibrium outcomes for various variables for each value of the tariff, conditional on the parameter settings in the first few columns of the spreadsheet. In particular, column R shows Home unweighted welfare, and column S shows Home weighted welfare, based on the weights given by cells F13-F15.
1. Calculate Home's import demand and Foreign's export supply as a function of P and parame- ters (a,b,c,d, a, b,c,d,t). Derive an expression for the world equilibrium price P as a func- tion of parameters (a,b,c,d,a,b,c,d",t).
2. Using the spreadsheet, calculate the world equilibrium price for a range of values of the tariff t. Derive values for the domestic price. Why do imports become zero above a certain tariff thresh- old? Correct the relevant prices accordingly in the spreadsheet. Calculate all other equilibrium in the spreadsheet.
3. Using the parameters for the U.S.-ROW sugar model detailed in Section 7.2, create a figure that plots U.S. social welfare on the vertical axis against the tariff level on the horizontal axis. Using this visual aid, find (to a reasonable approximation) the optimal tariff, and compare it to the tariff level of 12.38 cents per pound that is a good approximation for the actual policy. What can you learn from this comparison?
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