Suppose that the demand curve for electronic devices by US consumers is given by
ID: 1141400 • Letter: S
Question
Suppose that the demand curve for electronic devices by US consumers is given by:
QD = 1,000,000-1,000P
Further suppose that the supply curve for electronics produced by U.S companies is given by:
Qs = 500P - 125,000
a) Assuming that this is a competitive market, what will the equilibrium quantity & price for electronics be? (You may assume there is no significant trade between US & rest of the world for electronics).
b) What is the net gain to society (total surplus) from this market?
c) Now suppose US gains access to foreign markets & begin importing electronic devices. The world market for electronics is also competitive, & the competitive world price is $400 (i.e. the US can import as many electronic devices as it wants to at the world price). How many electronic devices will US consumers purchase now? How many of these devices will produced by US companies? How many of these devices will be imported from other countries?
d) What is the net gain to society from this market now? Has the US as a whole benefited by opening up trade to rest of the world? If it has not, explain why. If it has, describe at least one potential downside.
(PLS SHOW ALL THE WORK & answer will be rated)
Explanation / Answer
(a) In equilibrium, QD = Qs
1,000,000 - 1,000P = 500P - 125,000
1,500P = 1,125,000
P = $750
Q = 1,000,000 - (1,000 x 750) = 1,000,000 - 750,000 = 250,000
(b)
From demand function, when QD = 0, P = 1,000,000 / 1,000 = $1,000 (Reservation price)
Consumer surplus (CS) ($) = Area between demand curve and market price
= (1/2) x (1,000 - 750) x 250,000 = 125,000 x 250 = 31,250,000
From supply function, when Qs = 0, P = 125,000 / 500 = $250 (Minimum acceptable price)
Producer surplus ($) = Area between supply curve and market price
= (1/2) x (750 - 250) x 250,000 = 125,000 x 500 = 62,500,000
Total surplus (TS) ($) = CS + PS = 31,250,000 + 62,500,000 = 93,750,000
(c) When world price = $400,
QD (Domestic demand/purchase) = 1,000,000 - (1,000 x 400) = 1,000,000 - 400,000 = 600,000
Qs (Domestic supply/production) = (500 x 400) - 125,000 = 200,000 - 125,000 = 75,000
Imports = QD - Qs = 600,000 - 75,000 = 525,000
(d) With free trade,
New CS ($) = (1/2) x (1,000 - 400) x 600,000 = 300,000 x 600 = 180,000,000
New PS ($) = (1/2) x (400 - 250) x 75,000 = 37,500 x 150 = 5,625,000
New TS ($) = 180,000,000 + 5,625,000 = 185,625,000
Increase in TS ($) = 185,625,000 - 93,750,000 = 91,875,000
Even though TS has increased, meaning US has experienced a net social gain after free trade, a potential (and actual) downside is that producer surplus will decrease, which means that producers will be harmed.
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