Question

3. Refer to the figure. The United States is currently open to international trade in the market of basketballs, but domestic producers are lobbying to ban the importation of basketballs from abroad for national security reasons. Domestic producers claim that they are unable to compete with foreign producers based on price and that eventually they would be forced to close their shops domestically. This would give foreign producers the power to cut off the supply of basketballs to the United States hurting the United State's chances of winning the 2020 Olympics and removing the aura of invincibility in global conflicts that our basketball success has instilled. However, this argument by domestic producers is driven by their self-interest because closing the market to international trade results in an increase of producer surplus of dollars, a decrease in consumer surplus of dollars, and lost gains from trade of _dollars.(3 pts.) Domestic supply $30 World supply Domestic demand 800 1,000 2,000 4. (Figure: Foreign Trade with a Tariff) Refer to the figure. When this country is in a free- trade equilibrium, the number of units consumed is units of which units are produced domestically. After a $1 tariff is imposed, imports fall to units and the combined value of wasted resources and lost gains from trade is $_ . (4 pts.) A $1 tariff results in: Domestic supply World supply with tariff World supply Domestic demand Q (in Millions) 60 100 150 200 240

Answer 1

Answer: closing the market to international trade, the domestic producers will supply 1000 units at the price of $25 as at this price the domestic supply is equal to the domestic demand

Increase in producer surplus: $4,500

Producer supply when market was open for international trade:

Producer surplus is the difference between producer willing to sell his product and the prevailing market price of the product it is the area below price line till the point supply curve touches y axis

Producer surplus (is area of triangle) = 1/2 height * base

Height (price) = 20

Base (quantity) = 800

Producer surplus = ½ (20*800)

Producer surplus = $8000

Producer surplus after closing to trade :

Price = 25

Quantity = 1000

Producer surplus = ½ (25*1000)

Producer surplus = $12,500

Increase in producer surplus = producer surplus after closing to trade – producer surplus with open to trade

                                  = 12,500 – 8,000

Increase in producer surplus = $4,500

   

Decrease in consumer surplus: $7,500

Consumer surplus : is the difference between consumer is willing to pay for a good and the price he has to pay actually. It is the area above price line till the point demand curve touches y-axis

Price = 30-20 = $10

Quantity = 2000

Consumer surplus with open to trade (area of triangle) = ½ ($10 * 2000)

                                                                                 = $10,000

Consumer surplus after closing to trade :

Price = 30-25 = $5

Quantity = 1000

Consumer surplus = ½ (5*1000)

                              = 2500

Decrease in consumer surplus =$10,000 - $2,500

                                                    = $7,500

Lost gain from trade is $26,000

When economy was open to international trade the world price was $20

Domestic producers were producing 800 units at that price while domestic demand was 2000 so the rest (2000 - 800) 1200 units were being imported and gain from them was = 12,00*20 =$26,000. Now there is no international trade so economy looses all the gain from trade

Answer: 4:

In free trade equilibrium, the number of units consumed is = 240 units (in million) of which 60 units are produced domestically

In free trade the world price is $2 at which domestic demand is 240 so, 60 units are produced by domestic producers and rest 180 units are imported

Imports fall to 100 units

At $3 the domestic producers were producing 100 units and consumption demand was 200 so the rest 100 units were being imported

Lost gain from trade is $60

At $2 the imports were 180 so gain= 180*2 = $360

When tariff imposed and price become $3 the import reduces to 100 units gain = 100*3 = $300

Lost gain from trade = $360 -$300 = $60