For your next consulting assignment, you are employed by the European Trade Commission to examine the consequences of an EU-U.S. free trade agreement for autos. Your analysts have provided you with the demand and supply equations for both regions, as summarized in Table 2. For your analysis, assume that everyone trades in $US.
Table:
Europe U.S.
Supply QS(EU) = 10 + 10P QS(US) = 20 + 10P
Demand QD(EU) = 50 - 10P QD(US) = 40 - 10P
a) Before the regions open to trade, what are the domestic prices and quantities in Europe and the U.S.? Which country is the importer and which one the exporter?
b) To examine the impact of trade between the two regions, derive the excess demand function for the importing country.
c) Derive the export supply function for the exporting country.
d) Draw a 3-panel-graph, i.e., the European, World and U.S. markets next to each other, given the functions above (as shown in class).
e) If the free trade agreement were to be implemented, what would the world equilibrium market price be and what quantity would be traded?
f) The European Union is reluctant to agree to the free trade agreement due to political pressure from European producers. Therefore, they consider implementing a tariff of $0.50 (US) on every unit imported. Add the tariff to your graph and clearly indicate the total tariff revenues, as well as the quantities produced and consumed in both Europe and the U.S. with the tariff implemented.
g) If the tariff were implemented, what price would European consumers pay? What would U.S. producers receive?