ABIZ.3510 – UPDATED VERSION (April 5)
Assignment 2
Due Thursday, April 8 by 4:30 (leave with receptionist, not under my door)
You are employed as a policy analyst by Global Affairs Canada (GAC). The Canadian government is
considering liberalising some trade barriers under a new regional trade agreement. Your job is to
advise the government on the economic consequences of proposed policies. Note that Canada can be
considered a small country for this exercise.
1. An excess demand (for imports) function for eggs has been estimated as 𝑃 = 30 − 0.14𝑄. The
Canadian egg market is currently protected by a tariff rate quota of the following format: the in-quota
tariff is $3 per unit, the import quota volume is 100 units and the over-quota tariff is $12 per unit. The
world price for eggs is currently $8.
a) Draw the diagram for this market, and solve for the Canadian egg price and the volume of imports.
Label all relevant functions, axes, etc. (6 marks)
b) The Canadian government is considering reducing the over-quota tariff to $6. Modify the diagram
for this market, and solve for the Canadian egg price and the volume of imports. Label all relevant
functions, axes, etc. (4 marks)
c) The government is also considering lowering the in-quota tariff to $1 per unit, instead of reducing
the over-quota tariff. Modify the diagram for this market, and solve for the Canadian egg price and
the volume of imports. Label all relevant functions, axes, etc. (4 marks)
2. The Canadian government wants to implement a variable import levy in the market for corn. A corn
demand function has been estimated as 𝑃 = 20 − 1.4𝑄 and a supply function for corn has been
estimated as 𝑃 = 1 + 0.5𝑄. The current world price for corn in $4 per unit.
a) The target price for corn that is under consideration is $5.50 per unit. Draw a diagram for this market
and include the policy under consideration. What is the value of the tariff that would be required to
attain a domestic price of $5.50 per unit? Label all relevant functions, axes, etc. (4 marks)
b) If the world price of corn rises to $5 per unit, what is the value of the tariff required to attain a
domestic price of $5.50 per unit? (2 marks)
c) Canada is a small country in the world market for corn, but the US is a large country. If the US had
the same supply and demand functions as Canada, would the size of the variable levy required in the
US to attain a domestic price of $5.50 per unit be larger or small than the Canadian levy? Explain. Note
that you do not have to draw this diagram or solve for numeric values, just provide an intuitive
explanation. (3 marks).
Notes:
1. Show your work and conduct calculations to two decimal points.
2. Note that the axes on your diagram need not be to scale, as long as prices and quantities are
ordinally correct.
3. I recommend drawing diagrams in Microsoft PowerPoint - it is easy and neat.
4. No cover pages, binders, etc. Name and student number in top right hand corner of each page,
and STAPLE pages together. NO PAPERCLIPS!
5. Each student must submit individual work - explanations and descriptions must be unique.
6. 20% late penalty per day.