Question

Domestic Supply for t-shirts, Qs = 100P - 1000. Domestic Demand, Qd = 1000 -1P. Draw the American (domestic) Market for shirts with an Equilibrium DOMESTIC Price of $19.8 a shirt.

a. The Chinese can supply an unlimited number of shirts for $5.

b. The Vietnamese can supply and unlimited number of shirts for $7 a shirt.

c. Draw in the Chinese and Vietnamese price curves. (flat lines) d. Assuming there is free trade i. How much is domestically produced? ii. How much is domestically demanded?

iii. How much is imported? And from whom?

iv. Label 1. PS 2. CS

e. Now the US government adds a $10 tariff per shirt on CHINESE IMPORTS.

i. How much is domestically produced?

ii. How much is domestically demanded?

iii. How much is imported? AND FROM WHOM?

iv. Label with tariff

1. PS

2. CS

3. GR

4. DWL

v. Did this tariff help any Americans?

Answer 1

a).

Consider the given problem here the domestic demand and the supply of “t-shirt” are “Qd = 1000 – P” and “Qs= 100*P – 1000”, respectively. At the equilibrium the demand must be equal to supply.

=> Qd = Qs, => 1000 – P = 100*P – 1000, => 101*P = 2000, => P = 2000/101 = 19.8, => P = 19.8.

Now, the quantity demanded is “Qd = 1000 – P = 1000 – 19.8 = 980.2, => Qd=Qs=19.8.

So, the equilibrium price and the quantity demanded are “P=19.8” and “Q=980.2”. The following fig shows the domestic demand and supply of “t-shirts”.

Here “D” be the domestic demand and “S” be domestic supply of “t-shirts”, => the equilibrium is E1, where “D” and “S” cross to each other. So, the equilibrium price and the quantity demanded are “P1=19.8” and “Q1=980.2”.

b, c).

Consider the following fig.

The Chinese can supply an unlimited numbers of shirt at price $5, => the export supply of China is “P=5”. Here “SC” be the Chinese price line.

The Vietnamese can supply an unlimited numbers of shirt at price $7, => the export supply of Vietnamese is “P=7”. Here “SV” be the Vietnamese price line.

d).

Under the free trade US will import from China, as the import price is less for China. Now, here the intercept of the supply schedule is “10”, => the domestic producer want at least “$10”. So, if US import from China then US producer will produce nothing and entire “t-shirt” will be imported from China.

ii).

At, “P=5”, => Qd=1000 –P = 995, => 995 units of “t-shirts” will be imported.

iii).   

Here total import is “995” from Chine.

iv).

Domestic producer will produce nothing, => PS = 0, and the CS is given by the area “A1A4E2”.

=> A1A4E2 = 0.5*(1000-5)*Q2 = 0.5*995*995 = $495,012.5.