Question

In: Economics

The domestic supply and demand curves for designer handbags are as follows: Supply: P= 189+5Q                           

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.

  1. A. Calculate the domestic market for designer handbags price and quantity equilibrium.

B. Find the domestic quantity demanded and supplied of designer handbags that will result if the price imposition of $295 is imposed.

  1. Find the domestic quantity demanded and supplied of designer handbags that will result if the $15 tariff is imposed.
  1. Compute government revenue from the tariff.
  1. Illustrate ALL graphically

Solutions

Expert Solution

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.

Rahul Sunny answered 2 years ago
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