given by Q$iP) = 200P and QP(P) = 400 (a) Suppose this is a closed economy. Find the equi What are the consumer surplus, producer surpl For the remainder of the question, assume that the e (b) The world supply is perfectly elastic at price Pa price, quantity traded, and total import. What producer surplus, aggregate surplus, and gains

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answers for part b,c,d and e

3. Consider a market where the domestic supply and the domestic demand are
given by
QS(P) = 200P and qºP)=4000– 200P.
(a) Suppose this is a closed economy. Find the equilibrium price and quantity.
What are the consumer surplus, producer surplus, and aggregate surplus?
For the remainder of the question, assume that the economy is open.
(b) The world supply is perfectly elastic at price Pu = 5. Find the equilibrium
price, quantity traded, and total import. What are the consumer surplus,
producer surplus, aggregate surplus, and gains from the trade?
1
(c) Suppose the government wants to help the domestic producers by limiting
the imports to 1,200 units. Find the domestic equilibrium price, quantity
traded, and supply. Assuming that the price of the imported goods will rise
to the same level as the domestically produced goods, find the consumer
surplus, producer surplus and aggregate surplus. What is the dead weight
loss compared to free trade?
(d) Suppose the government wants to reduce the imports to 1,200 units by
using tariffs rather than direct quota. How should the government set
the tariff to achieve this? Compare the dead weight loss under tariff and
quota.
(e) Can you think of reasons why a government may want to use quota rather
than tariff?
Transcribed Image Text:3. Consider a market where the domestic supply and the domestic demand are given by QS(P) = 200P and qºP)=4000– 200P. (a) Suppose this is a closed economy. Find the equilibrium price and quantity. What are the consumer surplus, producer surplus, and aggregate surplus? For the remainder of the question, assume that the economy is open. (b) The world supply is perfectly elastic at price Pu = 5. Find the equilibrium price, quantity traded, and total import. What are the consumer surplus, producer surplus, aggregate surplus, and gains from the trade? 1 (c) Suppose the government wants to help the domestic producers by limiting the imports to 1,200 units. Find the domestic equilibrium price, quantity traded, and supply. Assuming that the price of the imported goods will rise to the same level as the domestically produced goods, find the consumer surplus, producer surplus and aggregate surplus. What is the dead weight loss compared to free trade? (d) Suppose the government wants to reduce the imports to 1,200 units by using tariffs rather than direct quota. How should the government set the tariff to achieve this? Compare the dead weight loss under tariff and quota. (e) Can you think of reasons why a government may want to use quota rather than tariff?
Expert Solution
Step 1

The domestic (ss) supply is,

Qs = 200P

The domestic (dd) demand is,

Qd = 4000- 200P

At free market equilibrium, dd = ss

⟹ 4000- 200P = 200P

⟹ 400P = 4000

⟹ P = $10

Qs = 200P

= 200*10

= 2000 units

The equilibrium price (P*) and quanity (Q*) are : $10 and 2000 units.

(b) The world price is Pw = 5.

The free market equilibrium price is P* = $ 10 (as calculated above).

The domestic dd at Pw = $5 is,

Qd’ = 4000- 200*5

= 3000 units

The domestic ss at Pw = $5 is  

Qs’ = 200*5

= 1000 units

The quantity traded in the domestic market is 1000 units.

At the Pw = $5 there is a shortage of commodity as quantity (ss) supplied is less than quantity (dd) demanded. This excess dd will be met by imports from foreign markets.

The import dd function is,

Md = Qd – Qs

= 4000- 200P – 200

Md = 4000 – 400P

Therefore, Md at Pw = $5 is,

= 4000 – 400*5

= 2000 units.

Therefore, total import is 2000 units.

CS at P* = $10

 = 1/2 * (20 - 10) * 2000

= 10000 units

PS at P*= $10

= 1/2 * 10 * 2000

= 10000 units

TS at P*= $10

= PS + CS

= 10000 + 10000

= 20000 units

CS at Pw = $5

CSw = 1/2 * (20 - 5) * 3000

= 22500 units.

PS at Pw = $5

PSw = 1/2 * 5 * 1000

= 2500 units.

TS at Pw = $5

= PSw + CSw

= 2500 + 22500

= 25000 units

Gains from trade = rise in TS

= TSw – TS

= 25000 – 20000

= 5000 units.

Therefore, at Pw = $5 the consumer surplus is CSw = 22500 units, producer surplus is PSw = 2500 units and TSw = 25000 units. The gains from trade is: 5000 units.

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