Question

Question 1

The demand for cars in a certain country is given by D = 15000 – 100P; where P is the price of a car. Supply by domestic cars producers is S = 8000 + 40P.

(a) Assuming that the economy is closed, find the equilibrium price and production quantity of cars in that country.

(b) The economy opens to trade. The world price of a car is $80. Find the domestic quantities demanded and supplied and the quantity of imports or exports. Who will support the opening of the car market to trade and who will oppose it?

(c) The domestic country’s government imposes an export tariff of $20 per car. Find the effects on domestic quantities demanded and supplied and on the quantity of imports or exports. Also find the tariff revenue collected by government. Who will support the imposition of tariff and who will oppose it?

(d) Suppose the government imposes an export quota of 1400 cars. Find the equilibrium price in the domestic car market, as well as the quantities produced by domestic firms and purchased by domestic consumers.

Answer 1

a) at equilibrium

D=S

Hence, 15000-100P = 8000+40P

7000 = 140P

P=50

Quantity supplied = 10000

b) world price = 80 = Pw

Pw > P

It means that the domestic producer is getting higher prices in world market .

Domestic demand at Pw= 15000 - 100×80

= 7000

Quantity supplied at Pw = 8000 + 40×80=

= 11200

Supplier will export = 11200- 7000

= 3200

Supplier would be happy with the export because they are getting higher prices while consumer would be against it.

c) now export tariff is 20$

Then prices for export become reduces to 60$

Quantity supplied at 60$= 8000+40×60

= 10400

Quantity demanded is same as before i.e 7000

Exported quantity = 3400

Export revenue = 3400 × 20

= 68000$

d) now the export quota of 1400 car is imposed  

Quantity supplied - quantity demanded in domestic market = 1400

15000 - 100P - 8000 - 40 P = 1400

7000 -140P = 1400

8400 = 140P

P=60

Quantity demanded in domestic market= 15000- 100×60

= 9000 cars

Quantity supplied = 10400.