Question

area 3 Hopefully, you understood the material on Consumer Surplus (CS) and Producer Surplus (PS) Now let's use those concepts to quantify the economic Consequences of imposing an Import tariff price of mangos 1 Assume the graphs represent the domestic market of mangos. Determine the following: competitive market equilibrium price would = domestic market supply curve of mangos competitive equilibrium quantity of magos =_ $3/lb. 2. Now assume the world market equilibrium price of mangos = $1.50/lb. and domestic producers have to compete $ 2.50/lb With foreign producers, then the following will occur area 1 a. the price of mangos domestic buyers pay domestic areat area 5 area 6 producers or foreign producers will =$1.50/lb. In order $1.5016 for the market to be in an equilibrium state with imports $1/lb. b. at that price quantity of mangos domestic buyers will buy domestic market demand curve for mangos from domestic producers = 40 million lbs c. and the quantity they will buy from foreign producers 0 30 million lbs. 60 million lbs, 90 million lbs. that is, the quantity of mangos imported will =80 million lbs. quantity of mangos d. therefore, total quantity demanded = 120 million lbs e. there will be an increase in Consumer Surplus = (see lecture note on Consumer Surplus) f. there will be a Decrease in Producer Surplus = See lecture notes on Producer Surplus g. therefore, there is a Net increase wealth from being free to import mangos =- See lecture on trade and tariffs 3. Now assume the Government imposes an import tariff of $.50/lb on imported mangos. Then the following will occur. That is, the following are the consequence of imposing an import tariff a. New equilibrium price domestic buyers pay and price domestic producers and foreign producers get paid will = since the foreign producers will pass the tariff onto domestic buyers and domestic producers also charge the same price b. New quantity of sugar supplied by domestic producers' will = c. New quantity of sugar imported from foreign producer's will = d. Therefore, the new quantity demanded by domestic buyers= e. Since the price rose 9.50/lb the decrease in Consumer Surplus will = . (see lecture notes on (CS) f. Since the price rose S. 50lb the increase in Producer Surplus will = (see lecture notes on (PS) g. Since the Government is collecting $.50/1b tax on imported mango the tariff revenue collected will = h. Since the decrease in Consumer Surplus is greater than the increase in Producer Surplus and the tariff revenue collected by Government there will be a "dead weight loss" =

Answer 1

1. Equilibrium price = $ 2.50

Equilibrium quantity = 80 million lbs

2. a) $ 1.50

b) 40 million

c) Imports = Quantity demanded at 1.50 - Quantity supplied at 1.50 = 120 million - 40 million = 80 million

d) Total quantity demanded = 120 million

e) Increase in consumer surplus = Area (1 + 2 + 3 + 4 + 5 + 6) = Area of rectangle + Area of triangle

= (2.50 - 1.50)(80 million - 0) + 1/2 x (120 million - 80 million)(2.50 - 1.50)

= 80 million + 20 million = $ 100 million

f) Decrease in producer surplus = Area (1 + 3) = Area of rectangle + Area of triangle

= (2.50 - 1.50)(40 million - 0) + 1/2 x (2.50 - 1.50)(80 million - 40 million)

= 40 million + 20 million = $ 60 million

g) Net Increase = Area (2 + 4 + 5 + 6) = Area (1 + 2 + 3 + 4 + 5 + 6) - Area (1 + 3)

= 100 million - 60 million = $ 40 million

3. a) New equilibrium price = $ 1.50 + 0.50 = $ 2

b) New quantity supplied by domestic producers = 60 million

c) New quantity of sugar imported = quantity demanded at $ 2 - quantity supplied at $ 2 = 100 million - 60 million

= 40 million

d) New quantity demanded by domestic buyers = 100 million

e) Decrease in consumer surplus = Area (3 + 4 + 5 + 6)

= (100 million - 0)(2 - 1.50) + 1/2 x (120 million - 100 million)(2 - 1.50)

= 50 million + 5 million = $ 55 million

f) Increase in producer surplus = Area (3) = (40 million - 0)(2 - 1.50) + 1/2 x (2 - 1.50)(60 million - 40 million)

= 20 million + 5 million = $ 25 million

g) Government revenue = Area 5 = (2 - 1.5)(100 million - 60 million) = 0.5 x 40 million = $ 20 million

h) Deadweight loss = Area 4 + Area 6

= 1/2 x (2 - 1.50)(60 million - 40 million) + 1/2 x (2 - 1.50)(120 million - 100 million)

= 5 million + 5 million = $ 10 million