Question

Table 1: Supply and Demand for Bushels of Soy bean: Mexico

Price ($)	Quantity Supplied	Quantity Demanded
180	81	0
160	72	9
140	63	18
120	54	27
100	45	36
80	36	45
60	27	54
40	18	63
20	9	72
0	0	81

Assume that Brazil and Canada can supply Soy beans to Mexico at a price of $40 and $60, respectively. In the presence of free trade, which nation exports Soy beans Mexico? How many bushels of Soy beans does Mexico produce, consume, and import? [2 points]

(ii) Assume Mexico levies a 100 percent nondiscriminatory tariff on its Soy beans imports. Which nation exports Soy beans to Mexico? How many bushels of Soy beans will Mexico produce, consume, and imports? [2 points]

(iii) Now suppose Mexico forms a customs union with Canada. Determine the trade creation effect and the trade diversion effect of the customs union. What is the customs union's overall impact on the welfare of Mexico? [8 points]

(iv) Assume instead that Mexico forms a customs union with Brazil. Is this a trade diverting or trade creating customs union? By how much does the customs union increase or decrease the welfare of Mexico? [8 points]

Answer 1