Suppose there are three countries, A, B and C, in the world and A imports automobiles from either a small country B or a large country C. Assume that the free-trade prices of automobiles from countries B and C are PB=$20,000 and PC=$16,000, respectively, and country A initially imposes a 20% tariff on both B and C. Now A is considering forming an FTA with either B or C. (a) Which one of these FTAs would lead to trade diversion? (b) Use a graph of import demand and export supply curves to show the impact of this FTA on country A’s welfare. (c) What would be country A’s net welfare change if country A formed instead an FTA that leads to trade creation? (d) Suppose country B may become more efficient after forming an FTA with country A and thus may be able to lower its price. What is the price cut required such that the FTA between A and B and the FTA between A and C would generate the same welfare gain for country A?

The small nation of Capralia has an abundant stock of Pashmina goats, a breed that yields high‑quality cashmere. Capralia's authorities are still debating whether to open their economy to international trade. The international price of cashmere is $70,000 per metric ton, and the Capralian cashmere sells for $50,000 per metric ton.

The following graph shows the domestic demand for and supply of oranges in Guatemala. The world price (Pw) of oranges is $550 per ton and is displayed as a horizontal black line. Throughout the question, assume that all countries under consideration are small, that is, the amount demanded by any one country does not affect the world price of oranges and that there are no transportation or transaction costs associated with International trade in oranges. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. PRICE (Dollars per ton) 820 790 760 730 700 670 640 610 580 550 520 0 Domestic Demand 1 Domestic Supply PW 30 60 90 120 150 180 210 240 270 300 QUANTITY (Tons of oranges) A tariff set at this level would raise (~.) ? If Guatemala is open to International trade In oranges without any restrictions, it will import Suppose the Guatemalan government wants to reduce imports to exactly 60 tons of oranges to help…

The small nation of Capralia has an abundant stock of Pashmina goats, a breed that yields high-quality cashmere. Capralia's authorities are still debating whether to open their economy to international trade. The international price of cashmere is $70,000 per metric ton, and the Capralian cashmere sells for $50,000 per metric ton. Place the consumer surplus triangle (CS) and the producer surplus triangle (PS) to correctly depict consumer and producer surplus if Capralia chooses to open its borders to the international cashmere trade. 100 Price ($/metric ton) 90 80 70 60 50 40 30 20 Capralia's Domestic Cashmere Market 10 0 0 6 domestic supply domestic quilibrium domestic demand 30 42 36 18 24 12 Quantity (thousands of metric tons). 48 54 60 CS APS ENG