Question

Suppose that Economica is a large country. The export supply curve is as follows Price Quantity 60 60 80 120 100 180 120 240 Assume that Economica imposes a $20 tariff on imported oil. Assume that the world price of oil is initially $80. a. Graph the import demand and export supply curves Calculate b. the price of oil in Economica c. the price of oil in the Rest of the World d. The change in producer surplus e. The change in consumer surplus f. Tariff revenue 20(180)-120 g. Oil imports h. the terms of trade effect i. total deadweight loss in the home country Bonus j. effect on foreign welfare k. effect on world welfare

Answer 1

As per the above data,

Price	Quantity
60	60
80	120
100	180
120	240

(a)

At Free trade Price (Pw), No supply will fall into S1 and domestic demand will rise to D1.

Please find the below graph for the same.

(b). The price of oil in Economica will be $100 as the oil that has been imported from rest of the world has been charged with tariff and that raised the price of imported oil at $100.

(c). The price of oil in rest of the world will be $80 since the import tariff is applicable to Economica only and there is no definition for rest of the world.

(d). Economica i.e domestic oil production will be 180 because any production beyond that induces higher price and world oil supply is stable at price 100$ .

Therefore Economica will only produce as much oil as equal to the price of world oil supply.

(e) Change is producer surplus will be producer surplus increase by “a”