Question

Use the following information on the supply and demand for oil in the hypothetical country Economica to answer the questions below. Assume that the demand and supply curves are linear. Questions 2a and 3 are worth 10 points. Each part of every other question is worth 5 points.

              Domestic           Domestic

Price ($)      Demand             Supply

60             460                 280

80             440                 320

100             420                 360

120             400                 400

140             380                 440

1. Assume that the world price of oil is $80 per barrel. Assume that Economica is a small country and that Economica imposes a $20 per barrel tariff on imported oil. Calculate the effect of the tariff on

a. Domestic producer surplus

b. Consumer surplus

c. Government tariff revenue

d. Consumption distortion loss

e. Production distortion loss

f. Total efficiency loss

g. Oil imports

2. Suppose that Economica is a large country. The export supply curve is as follows

Price     Quantity

60        60

80       120

100       180

120       240

Assume that Economica imposes a $20 tariff on imported oil. Assume that the world price of oil is initially $80.

a. Graph the import demand and export supply curves

Calculate

b. the price of oil in Economica

c. the price of oil in the Rest of the World

d. Domestic oil production

e. The change in producer surplus

f. The change in consumer surplus

g. Tariff revenue

h. Oil imports

i. the terms of trade effect

j. total deadweight loss

Bonus

k. effect on foreign welfare

l. effect on world welfare

PLEASE ANSWER QUESTION 2. All Parts.

Answer 1

Before the tariff , world price = $80 per barrel. After the imposition of tariff , price = $100 per barrel. Effect of tariff is shown below:

(a) Domestic producer surplus increases by rectangle area and triangle area =(100-80)(320) + (0.5)(100-80)(360-320)

=20(320) + (0.5)(20)(40)

= 6400 + 400

= $6800

(b) Domestic consumer surplus decreases by rectangle area and triangle area

= (100-80)(420) + (0.5)(100-80)(440-420)

=20(420) + (0.5)(20)(20)

=8400 + 200

= $ 8600

(c) Government tariff revenue is the area of rectangle = (100-80)(420-360)

= 20(60)= $ 1200

(d) Consumption distortion loss is the area of a triangle = (0.5)(100-80)(440-420)

= (0.5)(20)(20)

= $ 200

(e) Production distortion loss is the area of triangle = (0.5)(100-80)(360-320)

= (0.5)(20)(40)

= $ 400

(f) Total efficiency loss is the deadweight loss which is the sum of production distortion loss and consumption distortion loss.

$(200 + 400) = $600

(g) Oil imports = (420- 360) = 60 barrels of oil.