Question

Suppose that we have the following supply and demand functions for gumboots in a small, open economy called Finland:

QS=-30+2p QD =60–p

where QS and QD are measured in 1000’s of pairs of gumboots. The world price of

gumboots equals $25. Which of the following is TRUE?

1) The price of gumboots in Finland is $30 per pair. Finland will neither export nor import.

2) The price of gumboots in Finland is $25 per pair. Finland will import 15,000 pairs of gumboots.

3) The price of gumboots in Finland is $25 per pair. Finland will export 15,000 pairs of gumboots.

4) The price of gumboots in Finland is $25 per pair. Finland will neither export nor import.

Suppose that a small economy called New Zealand has the following supply and demand functions for washing machines:

QS =-1000+3p QD=3000–2p

Suppose the world price equals $400. If New Zealand wished to set a prohibitive tariff, then the per unit tariff would need to be at least

1) $100

2) $200

3) $400

4) $800

Suppose that we have the following inverse supply and inverse demand functions for gumboots in a small country called New Zealand:

p = 3 + 2QS and p = 21 – QD

where QS and QD are measured in 1000’s of pairs of gumboots. The world price of gumboots equals $11. New Zealand has a tariff equal to $6 per pair of gumboots. Which of the following is TRUE?

1) The price of gumboots in New Zealand is $15 per pair. New Zealand will neither export nor import.

2) The price of gumboots in New Zealand is $17 per pair. New Zealand will export 3,000 pairs of gumboots.

3) The price of gumboots in New Zealand is $17 per pair. New Zealand will import 3,000 pairs of gumboots.

4) The price of gumboots in New Zealand is $17 per pair. New Zealand will neither export nor import.

Suppose that we have the following supply and demand functions for a small country:

QS =-8+3p QD=20–p

Suppose the world price equals 3. If the country imposes a quota of 5 units then the terms of trade gain would be

1) 0

2) 5

3) 13.75

4) 15

Explain Step by step

Answer 1

1. We are given with Qs = -30 + 2p and Qd = 60 - p and world price is equal to $25.

As Finland is an open economy, it will deal in exports and imports and will take the world price given at $25. So, price of gumboots in finland will be equal to world price.

Qs and Qd at world price will be calculated by putting the value of p in both equations and we get Qs = -30 + 2(25) = 20 and Qd = 60-25 = 35. Demand in finland is greater than supply for 15000 pairs of gumboots. So, finland will import 15000 pairs to satisfy its demand.

Option 2 is correct ans as price will be $25 and import units will be 15000 pairs.

2. New zealand Qs = -1000+ 3p and Qd = 3000 - 2p for washing machines.

World price is equal to $400. At this price, Qd = 3000 - 2*400 = 2200 and Qs = -1000 + 3*400 = 200 . Demand is much higher than supply. New zealand wished to set a prohibitive tariff, in order to do that it should import that much tariff per unit that it makes impossible for importers to demand from world for washing machine.

To calculate this, we need to equate domestic supply to domestic demand

Qs = Qd, -1000 + 3p = 3000 - 2p , 5 p = 4000, p = 800

At this price, domestic market will be in equilibrium as demand is equal to supply. So, new zealnd should impose at least $400 per unit tariff which will give total price of $800. Higher than this will disturb the equilibrium and lower than this will not stop imports in the economy.

Option is 3

3. Inverse supply and demand functions are given as p= 3 + 2Qs and p= 21 - Qd. World price is equals to $11. New Zealand has a tariff equal to $6 per pair of gumboots.

Price for gumboots will be $17 for demand function with Qd = 21 - p = Qd = 21- 17= 4

and Qs will be p/2 - 3/2 = 7 .

at $17 price, quantity supplied is more than quantity demanded so, extra output can be exported to world at $11. Extra output of 3000 pairs will be exported by New zealand to world.

Option 2 is correct.

4. Supply and demand are given as Qs = -8 + 3p and Qd = 20 - p . World price equals $3. Country imposes an import quota of 5 units then there will be gap of 5 units between quantity supplied and quantity demanded.

Qd - Qs = 5 by solving this, we get

20 - p + 8 -3p =5, 28 - 4p = 5, 23 = 4p , p = 5.75

For this price, Qd is 14.25 and Qs is 9.25 with gap of 5 units of import quota.

Terms of trade is difference between domestic price and world price multiplied by quantity of import quota calculated as (5.75 - 3)*5 = 13.75

Option 3 is correct ans with terms of trade gain of 13.75.