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Tastes and tariffs

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Suppose that, from an initial equilibrium position in the offer curve diagram, country I imposes a tariff on country II's export good at the same time that consumers in country II change their tastes toward wanting more of II's export good. Illustrate and explain the impact of these two simultaneous events on country I's volume and terms of trade. (Assume that both countries' offer curves are "elastic" throughout.)

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Solution Summary

Examination of the effects of changes in taste and tariff increases on volume and terms of trade.

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See the attached file. Before the changes, country I's offer curve is indicated in red and country II's in blue. Country II is willing to give up Y1 in order to obtain ...

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