Question

Suppose initially Malaysia does not trade shuttlecocks. The market for shuttlecocks in Malaysia is perfectly competitive. The domestic demand curve for shuttlecocks is downward slopping. The domestic supply curve is perfectly elastic at a price of RM3 per shuttlecock, up to a quantity of 5000 shuttlecocks. Then the domestic supply curve is perfectly inelastic at the quantity of 5000 shuttlecocks. The perfectly competitive market price for shuttlecocks in Malaysia is RM5 per unit.

Note: Please use a separate diagram for each part of the question.

1. Using an appropriate diagram, illustrate the market for shuttlecocks in Malaysia without international trade. In your diagram, indicate the area of consumer surplus, producer surplus and social surplus.                                                                              
2. Suppose Malaysia starts to trade shuttlecocks with the rest of the world. The world price of shuttlecocks is RM8 per unit. Using a diagram, illustrate the market for shuttlecocks when Malaysia trades with the rest of the world, show any imports or exports of shuttlecocks. Who gains and who loses from Malaysia’s international trade in shuttlecocks and why?                                                                                                            

c) Suppose the government decides to impose a RM2 tax per shuttlecock on the domestic production shuttlecocks whether they are sold domestically or overseas. Are Malaysian consumers or producers worse off due to the tax? How much revenue will the government make from the tax? What is the effect on social surplus? Explain your answer fully using an appropriate diagram

Answer 1

a) The graph below shows the intersection of demand and supply curve in the shuttle cock market in Malaysia without international trade.

Supply curve is initially perfectly elastic (ES= infinite) upto the quantity of 5000 shuttlecocks.Afterwards it is perfectly inelastic

Demand curve is shown in negetive slope.

Market price is given RM5

The Equilibrium quantity comes to 5000 shuttle cocks.

Shaded area upper C.S is Consumers surplus while the shaded area lowerPS depicts producers surplus.

social surplus= CS+PS

b)When Malaysia enters into international trade, when world price is RM8, the producers will start​​Export with rest of the world.

​​​​​​

We find that, with world price of RM8-------#domestic supply will reduce to 1200 units ( approx).at a price of 8RM

#The export at this price will be 3800 units (5000-1200)

# The domestic consumers are worst hit in this case,as they will be charged higher price now

See the consumers surplus after free trade ( shaded area ABC)

# Domestic producers will gain in this scenario because the will sell at price of RM 8, 1200 units in domestic market and 3800 units in world market

The graph shows the producers surplus ( area BCFD) in domestic market.

C) when govt imposes tax per unit RM2------

See graph------

,# it is the producers whi are worse off as the burden of tax is imposed on that party who is less price sensitive, here in this scenario ,as we find that supply is perfectly inelastic, sellers are not sensitive to any price change, so they will bear the burden of tax.

#The price will remain same =RM5, so the tax burden is upon sellers

# tax revenue to govt will be ( see shaded area AEDB) =RM 5000

{1/2×5000×(5-3)}