Question

Suppose that the demand function is D(p) = 600 - 3p and the supply function is S(p) = 300 + 3p.

1. Derive the equilibrium price and quantity.

2. What is the change in consumer's surplus after an increase in the price of 50 dollars?

3. Now suppose South Korea is exporting phone to United States and the demand function for Korean phones in the United States is the same as above (in thousands of phones), where p is the price of Korean phones in hundreds of dollars. If the supply curve is horizontally fixed at 60 dollars, find the equilibrium number of Korean phones sold in the United States and what is the price of Korean phones in total?

4. Now, suppose that the United States imposes an import tax on Korean phones which is 20 dollars for every Korean phone, due to huge pressure from American phone manufacturers. Find the amount of Phones will be sold in the US now. At what price they will be sold? Draw supply and demand curves for both before and after tax scenarios

5. How much revenue will the U.S government collect by this tariff?

6. Suppose that instead of US tax on the Korean phones, the Korean government decides to impose an export restriction on their phone exports. They agree to sell only 360 Korean phones in US. If the Koreans know the American demand curve, they will sell their phones at what price in US?

7. If the Korean government is selling export licenses for each Korean phone to each Korean manufacturer and there are 360 export licenses, how much will a Korean firm be willing to pay the Korean government for an export license?

8. Why might the Korean government choose the choice in part “7” to the US taxation scenario?

Answer 1