Question

1. The demand for TVs in a certain country is given by D = 25000 – 70P; where P is the price of a TV. Supply by domestic TV producers is S = 15000 + 50P.

1. Assuming that the economy is closed, find the equilibrium price and production quantity of TVs.
2. The economy opens to trade. The world price of a TV is $80. Find the domestic quantities demanded and supplied and the quantity of imports or exports. Who will support the opening of the TV market to trade and who will oppose it?
3. The government imposes a tariff of $20 per TV. Find the effects on domestic quantities demanded and supplied and on the quantity of imports or exports. Also find the tariff revenue collected by government. Who will support the imposition of tariff and who will oppose it?  
4. Suppose the government imposes an import quota of 1200 TVs. Find the equilibrium price in the domestic TV market, as well as the quantities produced by domestic firms and purchased by domestic consumers.

Answer 1

(a)

Setting D = S,

25,000 - 70P = 15,000 + 50P

120P = 10,000

P = 83.33

Q = 15,000 + 4,166.5 = 19,166.5

(b)

When P = 80,

D = 25,000 - 70 x 80 = 19,400

S = 15,000 + 50 x 80 = 19,000

Imports = D - S = 19,400 - 19,000 = 400

Since after-trade price is lower than autarky price, consumer surplus (CS) will increase and producer surplus (PS) will decrease. So consumers will support it and producers will oppose it.

(c)

After tariff, P = 80 + 20 = 100

D = 25,000 - 70 x 100 = 18,000 (decrease by 1,400)

S = 15,000 + 50 x 100 = 20,000 (increase by 1,000)

Export = S - D = 2,000

Tariff revenue = 20 x 2,000 = 40,000

Since after-tariff price is higher than free-trade price, consumer surplus (CS) will decrease and producer surplus (PS) will increase. So consumers will oppose it and producers and government will support it.

(d)

Quota = D - S

25,000 - 70P - 15,000 - 50P = 1,200

10,000 - 120P = 1,200

120P = 8,800

P = 73.33

At this price,

D = 25,000 - 70 x 73.33 = 19,866.9

S = 15,000 + 50 x 73.33 = 18,666.5