Question

Assume: Demand Curve: QD = 80 – 10P; and Supply Curve: QS = 10P 7. Given the information derived above, identify on the graph consumer surplus and producer surplus for each situation as well as deadweight loss, if any. What is the total surplus? Quantify the quantity of goods imported. describe the implications of the imposition of a tariff in this market F. now assume a tariff of $1.00 is added to the world price of $2.00. INCLUDE A GRAPH

Answer 1

Demand. QD = 80 - 10P Supply Qs = 10P At equilibrium, QD=Qs 80 - 10P = 10P 20P = 80 P= 80/20 = $4 Q = 10P = 10*4 = 40 units Equilibrium price = $4 Equilibrium quantity = 40 units At a price of $2, QD= 80 – 2*10 = 80 - 20 = 60 units Qs = 10*2 = 20 units Imports = demand - supply = 60 - 20 = 40 units price (s) world price ор 20 40 60

Consumer surplus CS = 1 * 60* (8-2) Consumer surplus CS = 1/2*60*6 = 180 Producer surplus PS = 1/2*20* 2 = 20 Total surplus = consumer surplus + producer surplus Total surplus = 180 + 20 = 200 There is no dead weight loss associated with this situation When tariff imposes, price of imported goods increases. Here the world price is $2. When a tariff of $1 is added to the world price, price will increase to $3. At a price of $3. QD= 80 - 10P = 80 - 10*3 = 80 - 30 = 50 Qs = 10P = 10*3 = 30 Implications of this price increases are given below. A price increase decreases the quantity demand and consumer surplus But producer surplus is increased There is a government revenue derived from tariff tax. And this leads to a social loss (dead weight loss) Total surplus is decreased due to the existence of dead weight loss. |

price (8) world price 20 40 50 60 CS - Consumer Surplus PS - Producer Surplus R - tax revenue D - dead weight loss