Consider a hypothetical world consisting of only three count

Consider a hypothetical world consisting of only three countries: Hungry, Australia, and Italy. Each country produces grain. Hungary is a small economy compared to Australia and Italy and thus cannot influence foreign princes.

Solution

Consumer purchases at the lowest price possible.

Here, Australia is able to sell at $1, which is the lowest price. And as trade is open. So, price set will be $1, where Hungry could supply only 12 but demand is of 108. So, the remaining amount will be imported i.e. 108-12 = 96. Thus, 96,000 of bushels will be imported from the Australia.

Because of tariffs, the price will increase the supply that both countries can provide by t.

Now under this situation,

Australia is able to sell at $3, which is the lowest price. And as trade is open. So, price set will be $3, where Hungry could supply only 36 but demand is of 84. So, the remaining amount will be imported i.e. 84-36= 48. Thus, 48,000 of bushels will be imported from the Australia.

If there is a formation of the customs union between Hungary and Italy. That means Italy could enjoy the rebates on trading with Hungary which Australia can\'t. Thus, now the bushels would be imported from Italy, as its price would be the cheaper.

Due to the formation of the trade union, Italy can supply at its old price while Australia has to face the tariffs.

Trade effect due to the formation of the customs union:

Thus, the effect of the customs union on Hungary is positive as more demand can be satisfied at less price.

Production effect on Australia is negative because the demand of import is being satisfied by Italy.

Thus, Production effect due to custom on Italy is positive.

Effect of Customs Union:

customs unions have been viewed favorably. The reasoning was free trade maximizes world welfare; a customs union reduces tariffs and is, therefore, a movement towards free trade; a customs union will, therefore, increase world welfare even if it does not lead to a world-welfare maximization.

An important argument of a dynamic character is that a customs union will lead to enforced competition. As tariff fall away between union members, monopolies and cartels within individual countries become exposed to pressure in their domestic markets from firms elsewhere in the union.

customs unions will speed economic growth since the enlargement of the market will encourage innovation and technological change. As the market grows so the optimum size of firms will increase and additional resources are deployed into research and development.

Besides domestic investment, Union countries may experience a growth in investment from abroad, foreign firms with plants already within the Union may expand or regroup these to meet the new circumstances created by the union. Thus increase in the investment.

Thus, all the four boxes are correct.