Consider a small open economy. Suppose the domestic supply and demand for corn is

[Market Interventions and Government Policy]
Consider a small open economy. Suppose the domestic supply and demand for corn is

Qs =10P and Qd =200−10P. SupposetheworldpriceisPw =$6.

(a) Calculate the import quantity of corn, domestic consumer surplus and
producer surplus.
(b) Now suppose a $2 tariff is imposed on imported corn. Calculate the new equilibrium price and quantity, domestic CS, domestic PS, government tax revenue, and DWL.
(c) Show the CS, PS, government tax revenue, and DWL on a graph.
(d) Ignore part (b), suppose the government impose an import quota such
that the equilibrium price is P = 7. Show the new CS, PS, and DWL on a graph.

Solutions

Expert Solution

a) At world price of $6,

Import quantity = 140-60 = 80 units,

Consumer surplus = 1/2×140×14 =$980

Producer surplus = 1/2×60×6 =$180

b) With $2 tariff new equilibrium price = $8 and quantity = 120 units.

Domestic consumer surplus = 1/2×120×12 = $720

Domestic producer surplus = 1/2×80×8 =$320

Government tax revenue = 120×2 =$240

Dead weight loss (DWL) = 1/2×2×20 =$20

c) The graph is shown above

d) Similarly we can draw another graph where the price line is at P=$7.

Rahul Sunny answered 2 years ago

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