5. (20 Point) Consider the following graph of the market for computers. Price Do

Question

5. (20 Point) Consider the following graph of the market for computers. Price Domestic Supply 14 6 · ....4.--.... Price- World+Tariff ! Demand Quantity 10 40 60 80 100 Refer to the above figure and answer the following questions. a. In the absence of trade, how many Computers does this country produce and consume? b. In the absence of trade, what is the country's consumer plus producer surplus? c. With free trade and no tariffs, what is the quantity of Computers imported? d. With a specific tariff of $3 per unit, what is the quantity of Computers imports? e. With a specific tariff of $3 per unit, what is the import revenues collected by the government? f. What is the lowest specific tariff which would be considered prohibitive?

Explanation / Answer

(a)

In absence of trade, market for computers in economy is in equilibrium corresponding to price of $8 per computer and quantity of 60 computers.

So, in absence of trade, this country produced and consumed 60 computers.

(b)

Calculate the consumer surplus in absence of trade -

CS = 1/2 * (Y-intercept of demand curve - Equilibrium price) * Equilibrium quantity

CS = 1/2 * (14 - 8) * 60

CS = 180

Calculate the Producer surplus in absence of trade -

PS = 1/2 * (Equilibrium price - Y-intercept of supply curve) * Equilibrium quantity

PS = 1/2 * (8 - 2) * 60

PS = 180

Calculate the consumer plus producer surplus -

Consumer plus producer surplus = CS + PS = 180 + 180 = 360

So,

In the absence of trade, country's consumer plus producer surplus is $300.

(c)

With free trade and no tariff, the market for computers in the country will operate at world price of $3 per computer.

At price of $3 per computer, domestic demand is of 100 computers while domestic supply is of 10 computers.

Calculate Imports -

Imports = Domestic demand - Domestic supply = 100 computers - 10 computers = 90 computers

So,

With free trade and no tariff, the quantity of computers imported is 90 computers.

(d)

With imposition of tariff of $3 per unit, price in market for computers will be $6 per unit.

At price of $6 per unit, domestic demand is of 80 computers and domestic supply is of 40 computers.

Calculate imports after tariff -

Imports = Domestic demand - Domestic supply = 80 computers - 40 computers = 40 computers

So,

With specific tariff of $3 per unit, the quantity of computers imported is 40 computers.

(e)

Specific tariff = $3 per unit

Imports after tariff = 40 computers

Calculate the Tariff revenue -

Tariff revenue = Imports * Tariff = 40 * $3 = $120

The import revenue collected by the government is $120.

(f)

The tariff would be prohibitive only in case when it raise the world price so much that it becomes equal to equilibrium price without trade.

In such case, no imports will be made making tariff prohibitive as it will eliminate all imports.

Calculate the amount of Prohibitive Tariff -

Prohibitive tariff = Equilibrium price - World price = $8 - $3 = $5

So,

The lowest specific tariff which would be considered prohibitive is $5 per unit.

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