Question

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other? Explain. 2. The domestic conditions for the lead-acid batteries for country A and country B are as follows: Country A: P 3600-0.040 Country B: P 1300-0.012Q P 400 + 0.04Q P = 100 + 0.012Q 1) Suppose country A and country B engage in free trade based on their comparative advantage The world price is $1,000. Graphically show the international market of lead-acid batteries. Which country gains more from trade and specialization? 2) The lead-acid batteries industry creates substantial pollution. The dumping of wastes imposes negative externality on the environment and affects other members of the society. So the government of the exporting country wants the market decision-makers to internalize the costs to the environment. It charges a corrective tax of $624 per unit on domestic firms. How does it affect the trade pattern and the country's well-being? Page 5 of 6

Answer 1

a) For country A,

Demand is P=3600-0.04Q

and supply is P=400+0.04Q

For equilibrium, demand=supply

or, 3600-0.04Q=400+0.04Q

or, 0.08Q=3200

or, Q=40,000 units

and P=400+0.04*40,000 = $2000

For country B,

Demand is P=1300-0.012Q

and supply is P=100+0.012Q

For equilibrium, demand=supply

or, 1300-0.012Q=100+0.012Q

or, 0.024Q=1200

or, Q=50,000 units

and P=100+0.012*50,000=$700

In the diagram below, we have shown a rough diagram of the situation when free trade takes place.

Price Price Supply 2000 Supply 1000 1000 700 Demand emand 25,000 50,000 75,000 Quantity Quantity 15,000 40,000 65,000

Country A on left side and country B on the right side.

At world price of $1000, country B gains profit from trade as it can produce 75,000 units at this price and export 75000-25000 = 50000 units, whereas country A can only produce 15,000 units at this price.

b) Here exporting country is B.