International Economics Chapter 11 Problem Set
Suppose the United States could import footwear from Thailand at the price of $20 per pair or from Mexico at $24 per pair. The domestic price of footwear in the United States is $35. Suppose prior to NAFTA, the U.S. imposed a 50% tariff on all footwear entering the country.
a. Prior to NAFTA, would the United States import footwear? If yes, from which country? (3 points)
b. Suppose the US demand for footwear is given by Q = 100 – 2P. Assume US producers face a constant MC = $35. What is the welfare effect of joining the NAFTA for the US if doing so requires eliminating the tariff on Mexican made footwear? (7 points)
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Solution 1 a) 50% import tariff means import from Thailand cost 1.5 times of $20 = 30 and import
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