Suppose the world price for a good is 40 and the domestic demand and supply cure

Question

Suppose the world price for a good is 40 and the domestic demand and supply cureves are given as:

Demand: P=80-2Q

Supply: P=5+3Q

A) How much is consumed?

B) How much is produced at home?

C) What are the values of consumer and producer surplus?

D) If a tariff of 10 percent is imposed, by how much do consumption and domestic production change?

E) What is the change in consumer and producer surplus?

F) How much revenue doe the government earn from the tariff?

G) What is the net national cost of the tariff?

Explanation / Answer

Demand: P=80-2Q

Supply: P=5+3Q

At equilibrum

80-2Q=5+3Q

5Q=75

Q=15

P=80-30

=$50

the price of good in domestic supply is $50 which is greater than world price. Domestic consumer will prefer world's good .So domestic market have to supply at $40 otherwise there good will remain unsold.so there will not be equilibrum in domestic market

A)

since Demand is P=80-2Q and P=40

then 2Q=40

Q=20

So 20 units will be consumed

B)

since Supply is P=5+3Q and price will be 40

then 3Q=35

Q=35/3=12(after rounding)

so 12 units is produced at home.

C)

consumer surplus=0

producer surplus =50-40=10

D)

if a tariff of 10 percent is imposed,then world price,P=44

since Demand is P=80-2Q and P=44

then 2Q=36

Q=18

So 18 units will be consumed

since Supply is P=5+3Q and price will be 44

then 3Q=39

Q=39/3=13

so 13 units is produced at home.

consumption will decrease by 2 units and domestic production will increase by 1 unit.

E)

consumer surplus=0

producer surplus =50-44=6

G)

net national cost of the tariff=change in price due to tarrif * consumption=4*18=$72

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.