PROJECT DESCRIPTION—PART 2 (4.0 HOURS) Project Introduction: Suppose that the U.S. currently buys and produces wingdings, a fictitious economic good. The U.S. faces the world price, and domestic suppliers sell as many wingdings as possible at the world price. Now, the government succumbs to lobbying by wingding producers and imposes a protective tariff on wingdings amounting to $2 per wingding. The graph below represents this situation. ES2550: Project Page 3 World Price World Price + Tariff U.S. Supply U.S. Demand Price Quantity (millions of pounds) 6 1 2 1 6 1 8 2 6 6 8 1 0 4 Market for Wingdings Part 1: Answer the following questions. Use formulas and show calculations as well as final answers. a. Does the United States have a comparative advantage in wingdings? Explain. b. Discuss the effect of the tariff on the number of imports. c. How did the imposition of the tariff change consumer surplus? d. How did the imposition of the tariff change producer surplus? e. What is the overall result of the tariff in terms of welfare? Part 2: Allowing free trade between countries can be beneficial, but it also imposes costs. Use the ITT Tech Virtual Library to research the costs and benefits of allowing free trade. Discuss aspects of free trade that some may consider unfair. For example: a. Distribution of costs and benefits of free trade. In other words, does everyone share in the gains and the costs equally? b. Competing with different labor restrictions (or lack thereof), such as slave or child labor. ES2550: Project Page 4 c. Differences in environmental standards. Part 3: Research trade between the United States and another country in any one of the following areas: customer support services, garments, medical services, or technical products. Discuss the following points: a. How is this trade arrangement beneficial? Explain. b. Are there any aspects of this trade arrangement that may be considered unfair, i.e. labor conditions or environmental conditions? c. Discuss a possible solution for minimizing harms mentioned in part b. Course Objectives Tested: 1. Explain key microeconomic terminology. 3. Create and use economic graphs and numerical models to analyze and solve microeconomic problems. 4. Explain the costs and benefits of international trade, including calculation of gains from trade. 7. Compare and contrast optimal pricing and output decisions in various market structures. 8. Apply supply and demand theory to both product and factor markets.
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