Question

Consider the following Market Demand and Supply Curves.

Qd = 30-P

Qs = P

a.If the world price is 5,

1.how much will be imported?

2.What is the change in Consumer Surplus?

3.What is the change in Producer Surplus?

b. If a tariff of $2 is imposed

1.how much will be imported?

2.What is the change in Consumer Surplus as a result of tariff?

3.What is the change in Producer Surplus as a result of tariff?

4.What is the government revenue?

5.What is the dead weight loss?

Answer 1

With no international trade,

Q_d=Q_s

30-P=P

P=15

Equilibrium price, P=15, Equilibrium quantity, Q=15

Consumer Surplus = 1/2 * (30-15)*15 = 112.5

Producer Surplus = 1/2 * 15 * 15 = 112.5

a. The world Price is 5, its is less than equilibrium price 15.

so the rest of the world has a comparative advantage.

At, world price 5, producers produces 5 unit of goods(Q_s=5)

At, world price 5, consumers buy 25 unit of goods

1. Producer will import 25-5 = 20 unit of product

2. Consumer surplus : 1/2 * (25) * (30-5) = 312.5

3. Producer Surplus : 1/2 * (5) * (5) = 12.5

Total Surplus = 325

b. tariff of $2 is imposed

producers produces 7 unit of goods and consumers buy 23 units of good

1. So, a total of (23-7) = 16 units of product imported

2. Consumer Surplus : 1/2 * (30-7)*(23) = 264.5

3. Producer Surplus = 1/2*(7)*(7)= 24.5

4. govt revenue = (2*16)=32

5.  Thus, total welfare, which is consumer surplus plus producer surplus plus government revenue, equals $321

In part (a), total surplus equaled consumer surplus plus producer surplus, which is equal to $325

Thus the deadweight loss, which is the lost welfare, equals 325-321 = $4