The domestic demand for portable radios is given by Q = 5,000-100p, where price

Question

The domestic demand for portable radios is given by Q = 5,000-100p, where price p is measured in dollars and quantity Q is measured in thousands of radios per year. The domestic supply curve for radios is given by Q = 150p. What is the domestic equilibrium in the portable radio market? Suppose portable radios can be imported at a world price of $10 per radio. If trade were unencumbered, what would be the new market equilibrium? How many portable radios would be imported? If domestic portable radio producers succeeded in having a $5 tariff implemented, how would this change the market equilibrium? How much would be collected in tariff revenues? How much consumer surplus would be transferred to domestic producers? What would be the deadweight loss from the tariff? How would your result from part (c) be changed if the government reached an agreement with foreign suppliers to "voluntarily" limit the portable radios they export to 1,250 per year? Explain how this differs from the case of a tariff.

Explanation / Answer

At equilibrium,

Demand = Supply

5000 – 100P = 150P

250P = 5000

P = 5000 / 250 = 20

Quantity demanded = 5000 – 100 x 20 = 3000

Quantity supplied = 150 x 20 = 3000

Quantity demanded when P is 10 = 5000 – 100 x 10 = 4000

Quantity supplied = 150 x 10 = 1500

This means that if the price is $10 then there will be a shortage of 2500 units which will be imported and the new equilibrium will be 4000 units.

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