Answer Happy

This problem set explores how open trade and tariffs impact the markets. The problem set assumes that Mexico produces and sells shirts and pottery, and the graphs illustrate the markets for shirts and pottery in Mexico. the market prices for shirts and pottery are determined in a perfectly competitive market without externalities. the production decisions for shirts and pottery are determined in a perfectly competitive market without externalities. ● . TARIFF PROBLEM SET . the goods are denominated in U.S. dollars, even though Mexico uses the peso as its currency unit.

● . Market for Pottery Price of Pottery $85 $65 $40 6. In the absence of trade with other countries, the equilibrium price of pottery is $40 . the equilibrium quantity of pottery is 40 ● $15 $5 ● 20 40 millions of pottery units. 7. Assume Mexico enters a trade agreement and opens its market of pottery to the world, where the world price of pottery is $65. In the presence of trade with other countries, the domestic production of pottery is the domestic quantity demanded is, Mexico (exports or imports)_ 60 70 Domestic Supply Domestic demand Quantity of Pottery (millions) millions of pottery units. millions of pottery units. millions of pottery units. 8. Does Mexico have a comparative advantage or comparative disadvantage in the market for pottery? Explain how you arrived at your conclusion. 9. For the market for pottery, would an import tariff expand Mexican production? Explain how you came to your conclusion. 10. If a tariff on pottery expands Mexican production, who benefits from the tariff? If the tariff on pottery does not expand Mexican production, ignore this question.