Suppose That the Constant Marginal Cost of Producing an Automobile

question 59

Essay

Suppose that the constant marginal cost of producing an automobile is $11,000 in Canada, $8,000 in the United States, and $12,000 in Japan.
a.Under free trade, would Canada produce its own cars or import them? If it imports, which country will it import from?
b.If the Canadian government imposes a 100% tariff on all auto imports, would it produce its own automobiles or import them? If it imports, which country will it import from?
c.Canada has a tariff of 100% on imported autos.Then Canada decides to join a customs union with the United States (with a uniform external tariff of 100%).After the customs union is formed, what will the domestic price of automobiles be in Canada?
d.If Canada decides to join this customs union with the United States, will there be trade creation, trade diversion, or both? Explain.