Question

7. In Figure 4 supply and demand curves are drawn on a grid from which you can read corresponding prices and quantities. The curves represent the domestic market for a good in a small country. For the initial demand curve, Di, what is the autarky price? Suppose that the world price is $6, as shown. At this world price, how much would the country demand of the good, how much would it supply, and how much would it import? a. b. Figure 4 $26 18ー 16 12 10- 5 10 15 20 25 30 35 40 45 50 55 c. Suppose now that the country imposes a specific tariff of $4 per unit of the good. What is new the domestic price and how much does the country demand and supply? Also, how much does the government collect in tarif revenue? d. if the demand curve were now to shift to the position shown as D, with the $4 tariff still in place and the world ll $6, what is new the domestic price, and how much does the country demand and supply? Also, how much does the government collect in tariff revenue with the new demand curve? e. Suppose rather than the $4 tariff, the government imposed an import quota of 15, in other words, only 15 units

Answer 1

A. For the initial demand curve d1, the autarky price is $14 at which the quantity demanded is equal to quantity supplied.

B. If the world price is $6, the country would demand 40 units of the good, the supply would be 10 units and it would import balance 30(40-10) units of the good.

C. If the country imposes a special tariff of $4 per unit of the good, the new domestic price is,

= current price + special tariff

= $6+$4 = $10.

The country demand at this price is 35 units of the good and the supply is 20 units. Government will collect the tariff on the basis of goods sold:

= No of units sold*tariff rate per unit

=20* $4 =$80