Question

You are given the following global market data.

The world price for a good is 40 and the domestic demand-and-supply curves are given by the following equations:

Demand: P=100-0.5Q
Supply: P=70+0.4Q

where P=price and Q=quantity

1. Calculate how much is consumed.
2. Calculate how much is produced in the home economy.
3. Fine the consumer surplus and producer surplus.
4. If a tariff of 20 percent is imposed, by how much do consumption and domestic production change?
5. How much revenue does the government earn from the tariff?

I got calculations for # 1 and #2, but the negative for quantity is confusing me on how to graph this so I can't calculate consumer surplus or producer surplus without the graph. can someone please help?

Answer 1

Equilibrium Point occures with the intersection of demand and supply .

Mathematically, -----

Qd=Qs

100-0•5Q= 70+0•4Q

Q=33•33

Substituting the value in demand equation----

P= 100-0•5(33•33)= 83•33$

Graphically----

1) Quantity consumed( demanded) = 120 units

2) No quantity is produced by domestic producers,As the world price is $40, whole quantity is imported as domestic producers cannot meet demand at such price because the minimum price they can charge is $70

3)Consumers surplus= $3600

1/2(100-40)(120)=$3600

Producers surplus is not occuring there.

Rather ,there is producers deficit =$1800

{ 1/2(120)(70-40)}

4) when tariff of 20% is imposed on imports, ------

See graph-----

* Change in consumption is from 120 units to 104 units

* There is still no supply from home producers as Minimum price is still higher than world price after tariff.

5)Govt revenue = $ $832

( 48-40)×104= 832