In: Economics
The domestic supply and demand curves for designer handbags are as follows:
Supply: P= 189+5Q Demand: P=414-4Q
where P is the price in dollars and the Q is the quantity in hundreds. The U.S. is a small producer in the world handbag market. Where the current price (which will not be affected by anything we do) is $ 295 during free trade.
Congress is considering a tariff of $15.
B. Find the domestic quantity demanded and supplied of designer handbags that will result if the price imposition of $295 is imposed.
A. At equilibrium, domestic demand = domestic supply
414-4Q = 189+5Q
Q = 225/9 = 25 and P = 414-4*25 = 314
B. Demand curve is P = 414-4Q
At price = 295, 295=414-4Q
Domestic quantity demanded Q = 119/4 = 29.75
Supply curve is P = 189+5Q
At price = 295, 295=189+5Q
Domestic quantity supplied Q = 106/5 = 21.2
C. If tariff of $15 is imposed, the price = 295+15 = $310
At price = 310, 310=414-4Q
Domestic quantity demanded Q = 104/4 = 26
Supply curve is P = 189+5Q
At price = 310, 310=189+5Q
Domestic quantity supplied Q = 121/5 = 24.2 or 24
D. Import = Domestic quantity demanded-Domestic quantity supplied = 26-24 = 2
Government revenue = 2*15 = $30
In above graph, blue line is demand and red line is supply curve. Green line when intersects with demand and supply curve, gives domestic quantity demanded and supplied respectively when price = $295. Purple line when intersects with demand and supply curve, gives domestic quantity demanded and supplied respectively when price = $310 including tariff of $15. The area between purple and green line and between quantity of 24 and 26 gives the government revenue.