Question

1. Paradise is a small country that under free trade imports roses at $2.00 a dozen. Its domestic demand curve and domestic supply curve for roses are as follows:

                        D = 100 - 10 P                         S = 10 + 10 P

1. Calculate the equilibrium quantity imported under free trade.

Under free trade:       M = _________

2. If the government imposes a tariff of $1.00 on roses show graphically and calculate the impact of this tariff

Graph:

             Under tariff:

1. Domestic price                                   increases / decreases by _________.

2. Imports                                              increase / decrease by _________.

3. Producer surplus                               increases / decreases by _________.

4. Government revenue                                     increases / decreases by _________.

5. Consumer surplus                             increases / decreases by _________.

6. Efficiency (Deadweight) loss             _________.    

           

3. Under the tariff of $1.00, if there is an increase in demand for roses in Paradise such that the new demand curve is:

                        D=120 – 10P

                       

                        Graph:

1. Domestic price           increases / decreases by _________/ no change.

2. Imports                       increases / decreases by _________/ no change.

4. How would your answer to part c change under an equivalent quota (same amount imported as under tariff of $1.00)?

                        Graph:

1. Domestic price           increases / decreases by _________/ no change.

2. Imports                       increases / decreases by _________/ no change.

5. Starting with the original demand and supply curves under free trade, suppose that the domestic producers convince the government (by sending them free roses) that the government should use policies to make it possible for them to sell 50 dozen domestic roses in the market. What import quota should the government set to make this possible? Show graphically and calculate the impact of this quota on:

Graph:

Under quota:

1. Domestic price                       increases / decreases by _________.

2. Imports                                  increase / decrease by _________.

3. Producer surplus                   increases / decreases by _________.

4. Consumer surplus                 increases / decreases by _________.

Efficiency (Deadweight) loss            

Answer 1