Trade creation maximized by low initial tariff and high demand elasticity Steps: - Trade creation measures the beneficial increase in efficient imports from union partner Y after tariff removal, replacing higher-cost domestic output or expanding consumption. - The volume of created trade depends on the price reduction (proportional to existing tariff) and the responsiveness of demand (price elasticity). - A small existing tariff implies higher pre-union imports from Y (less protection), providing a larger base quantity for expansion upon removal. - High demand elasticity (|e| = 1.4) ensures a larger quantity response to the price drop, maximizing absolute increase in imports. Why B is correct: - Small tariff allows large initial import base; high elasticity (-1.4) amplifies quantity increase per the formula ΔQ ≈ |e| × (ΔP/P) × Q_initial, yielding largest ΔQ. Why the others are wrong: - A: Large tariff shrinks initial Q base; low elasticity (-0.8) limits response, small ΔQ. - C: Small tariff gives large base, but low elasticity (-0.8) yields minimal quantity response. - D: Large tariff shrinks initial base despite high elasticity (-1.4), resulting in …