Question

^{4. (90pts) Suppose that the market Demand for beer in Ireland, QD, is given by P= 900 - QD. (1) There are two identical suppliers of beer in the Irish market, each of which has the identical Supply schedule of beer, Qs, given by the following P = 100 + 2Qs. (2) We note that the price of beer is expressed in dollars, and the quantities are expressed in kegs ("barrels”) of beer per day. a. (10pts) Calculate the market equilibrium price and quantity. No need to draw a graph. b. (30pts) Suppose the Irish government decides to open the beer market for free international trade and that the world price of beer is $300 per keg. i. (10pts) What assumption must we make on the size of the Irish market for our analysis to be valid? ii. (20pts) Draw a graph of the new "open" Irish beer market. Be sure to label the axes and the curves, and mark in the new equilibrium price and quantity. Graphically demonstrate the benefit of trade and compute the consumer surplus, producer surplus, and total surplus. c. (50pts) The Irish producers of beer hire some lobbyists. After several days of lobbying activity, the government decides to impose a tariff of T = $100 on each keg of beer that is imported to Ireland from a foreign country. Relative to your answer in (b) part (ii) and using a carefully labelled diagram, comment on who benefits from this policy. Specifically, calculate the changes due to the tariff. That is, the consumer surplus, the producer surplus, the government revenue from tariffs, and the dead weight loss.}

Answer 1

Marcket Demand, P= 900- Supply Equation, P=100+20s We know that, at equilibrium MR=MC TR= PxQ 900- - 9009 - MR= dTR = de poo-20 TC - Px - 100+20, xQ = 1009 +200 MC = 100+40 Now, equatting MR- MC. 900-28 = 100+40 sa 60 = 800 9 : 400 P= 900 - foo - $4500 1900 Now since The $76667 $633-33 there are two firms quantity Supplied - 400x2 = 800 units = 266.67 units

b. (1) The assumption we need to make for this price to prevail is that the Irish market should not be able to influence the price of the international market. Hence, the economy should be small and a price-taker

633-33 100 200 300 266.63 400 500 600 700 800 900 Due to at the increased trade, the price of beer went down same time, the quantity supplied in and also New New Consumer Producer Surplus = A +B+C Surplus = D. 2) Total Surplus = CS+PS 2 - A+B+C+PD

s C) goo+ 7oot 600 6 x soof 400 -- -New QI Old courses 300 200 loo 200. 30. hoc suo 600 700 800 900
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