Consider three hypothetical countries: Toluca Lake (T), Shepherd’s Glen (S), and Brahms (B). You are the ruler of Brahms, and you need to decide the trade policy in your country. Your domestic consumers have a market demand of [tex] P = 80 - Q [/tex] and your domestic producers have a market supply of [tex] P = 40 + Q [/tex]. Brahms is a small country, facing prices [tex] P_T = 18 [/tex] and [tex] P_S = 15 [/tex] from Toluca Lake and Shepherd’s Glen, respectively.

Consider the following scenarios:

1.1 Suppose Brahms is autarkic but is considering opening up to trade. Brahms’ import demand curve will be [tex] P = \alpha - \beta Q [/tex]. What are [tex] \alpha [/tex] and [tex] \beta [/tex]?
- [tex] \alpha = 60 [/tex]
- [tex] \beta = 0.5 [/tex]

1.2 Suppose Brahms is autarkic but is considering opening up to trade. Calculate Brahms' change in welfare if it opened to free trade.
- Change in welfare: 2025

1.3 Suppose Brahms is not autarkic and has a 40% tariff on imports. Calculate Brahms' change in welfare if it instead traded freely with Toluca Lake.

Brahms is considering its trade policy with Toluca Lake. Currently, Brahms has a 40% tariff on imports. To calculate the change in welfare if Brahms were to trade freely with Toluca Lake, we need to compare the welfare under the current tariff policy to the welfare under free trade.

The domestic equilibrium price and quantity in Brahms. The domestic demand is given by P = 80 - Q, and the domestic supply is given by P = 40 + Q. By setting these two equations equal to each other, we find that the equilibrium price (Pd) is 60 and the equilibrium quantity (Qd) is 20. Under the current tariff policy, the world price of the imported good is PT = 18. With a 40% tariff, the effective price in Brahms (Pc) is 1.4 times the world price, which is 1.4 * 18 = 25.2. This tariff leads to a new quantity demanded (Qc) of 34.8. Under free trade, the price would equal the world price of 18, and the quantity demanded (Qf) would be 62. By comparing the quantities under the tariff (Qc) and under free trade (Qf), we can calculate the change in welfare. The change in consumer surplus is the area between the demand curve (P = 80 - Q) and the price under free trade (18), from Q = Qc to Q = Qf. The change in producer surplus is the area between the supply curve (P = 40 + Q) and the price under free trade (18), from Q = Qd to Q = Qf.

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