2. Fredonia does not grow any wheat, but domestic demand is described by P=100-.5Q. Initially, wheat is in infinitely elastic supply to Fredonia from Tralfamadore at a price of 30. a. Fredonia levies of tariff of 20 on imports of wheat into the country. Draw a demand curve showing the price and quantity of wheat demanded as well as the tariff revenue. b. Fredonia now enters into a free trade agreement with Sylvania. Wheat is available from Sylvania in infinitely elastic supply at a price of 40. On your diagram indicate the price and quantity of wheat demanded after the formation of the free trade area. Show the change in consumer surplus and change in government revenue that result from formation of the free trade area. c. Compute the change in consumer surplus, the change in tariff revenue, and the change in welfare resulting from the formation of the free trade area. Explain your answer. d. What term do economists use to describe the phenomenon illustrated in this example? Fully explain the meaning of this term.

2. Fredonia does not grow any wheat, but domestic demand is described by P=100-.5Q. Initially, wheat is in infinitely elastic supply to Fredonia from Tralfamadore at a price of 30. a. Fredonia levies of tariff of 20 on imports of wheat into the country. Draw a demand curve showing the price and quantity of wheat demanded as well as the tariff revenue. b. Fredonia now enters into a free trade agreement with Sylvania. Wheat is available from Sylvania in infinitely elastic supply at a price of 40. On your diagram indicate the price and quantity of wheat demanded after the formation of the free trade area. Show the change in consumer surplus and change in government revenue that result from formation of the free trade area. c. Compute the change in consumer surplus, the change in tariff revenue, and the change in welfare resulting from the formation of the free trade area. Explain your answer. d. What term do economists use to describe the phenomenon illustrated in this example? Fully explain the meaning of this term.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

2. Fredonia does not grow any wheat, but domestic demand is described by P=100-.5Q. Initially,
wheat is in infinitely elastic supply to Fredonia from Tralfamadore at a price of 30.
a. Fredonia levies of tariff of 20 on imports of wheat into the country. Draw a demand curve showing the
price and quantity of wheat demanded as well as the tariff revenue.
b. Fredonia now enters into a free trade agreement with Sylvania. Wheat is available from Sylvania in
infinitely elastic supply at a price of 40. On your diagram indicate the price and quantity of wheat
demanded after the formation of the free trade area. Show the change in consumer surplus and change in
government revenue that result from formation of the free trade area.
c. Compute the change in consumer surplus, the change in tariff revenue, and the change in welfare
resulting from the formation of the free trade area. Explain your answer.
d. What term do economists use to describe the phenomenon illustrated in this example? Fully explain the
meaning of this term.

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