Question

5. A small closed economy features the following demand and supply functions on a given market: QD = 500 - 10P and QS = 15P. The price in the world market of this good equals 10 monetary units.

a) In case this economy engages in international trade, will it become an importer or exporter? Explain and determine the volume of these imports or exports.

b) Represent on a graph (and in a clear manner) the changes taking place in consumer surplus, producer surplus and total surplus as a result of the international trade described in the previous question.

c) Suppose now that the government of this economy introduces an import quota in the amount of 125 units. The domestic sellers who are allowed to sell foreign goods are randomly chosen by means of a lottery. Represent on a graph (again in a clear manner) the changes taking place in consumer surplus, producer surplus and total surplus by comparison with the free trade outcome.

d) The government now decides to replace the import quota with a tariff such that total surplus in this economy remains the same in each case. Determine what the value of the tariff must be and what the quantities demanded and supplied in the domestic market will be so as to retain a similar level of imports. What is the amount of government's revenues from this tariff? Illustrate your answer with a graph.

Answer 1

Pw=10 then so do = 500 tollos-400 Is = 15(10)=150 timport = 400-150 - 250 In Autarty asos 150 300 350 400 500 oty 500-lop=15P (P=20] Aloty = 300 Consumer suply increases are arbre 10x300 + 2 x 100 Decros in producer suples - = 3000+00 = 300 areaa - KIOX150 + lo XIS 70 +1500 2750 in to fail Suples & area brc = 3500 250 = 1250 Import dusta a 125 unit do &=1250 500-10P-15P =125 - 375=280 P = 375 = 15 C.S. deceases by 5X350 + 2 x 5100 = 1750 +125= 1875 Ps & by 45x75+ 150x5 - 750+ 187.5=937.5 tarifs- &5 ,p=15, do = 310 Tarif Revenue = (350-225) ₂5 - Tarifs Red 125x5 625