Question

Demand is given by the equation QD=100-P; supply is given by QS= 4P

Suppose the world price of each unit is $25. Now assume that this economy is open to world trade. How many units will they import or export? Calculate the consumer surplus, producer surplus and total surplus.

Help me solve,

A Continue to assume that this economy is open to world trade. Suppose the government enacts a tariff off $2 per pound of cocoa beans. Calculate the consumer surplus, producer surplus, total surplus and deadweight loss with the tariff. What is the total revenue of the tariff?

B. Continue to assume that this economy is open to world trade. Suppose the government enacts a tariff off $2 per pound of cocoa beans. Calculate the consumer surplus, producer surplus, total surplus and deadweight loss with the tariff. What is the total revenue of the tariff?

They are one question. Thank you

Answer 1

Qd = 100 - P

Qs = 4P

a)

At equilibrium, demand = supply

Equilibrium occurs when 100 - P = 4P

P = 20

At this price, Q = 80

At world price of $25, there is quantity supplued of 100 units while quantity demanded of 25 units which means there are exports of 100 - 75 = 25 units

Consumer surplus is area of portion A whose sum is (1/2) * (75 - 0) * (100 - 25) = 2,812.5

Producer surplus is area of portion B + C + E + D whose sum is (1/2) * (25 - 0) * (100 - 0) = 1,250

b)

After $2 tariff imposed on exports to reduce the quantity of exports, there will be quantity supplied of 92 while quantity demanded of 77 units at a price of $23 which means exports quantity would be 92 - 77 = 15

Consumer surplus under tariff would be area of surplus A + B + F whose sum is (1/2) * (77 - 0) * (100 - 23) = 2,964.5

Producer surplus under tariff would be area of surplus I + E + C + H whose sum is (1/2) * (92 - 0) * (23 - 0) = 1,058

Government revenue is area of portion D whose sum is (92 - 77) * (25 - 23) = 30

Deadwight loss is area of portion J + K whose sum is (1/2) * (25 - 23) * (77 - 75) + (1/2) * (25 - 23) * (100 - 92) = 2 + 8 = 10