The figure below shows the hypothetical domestic supply and demand for baseball caps in the country of Spain.
The figure below shows the hypothetical domestic supply and demand for baseball caps in the country of Spain.
Suppose that the world price of baseball caps is €2 and there are no import restrictions on this product. Assume that Spanish consumers are indifferent between domestic and imported baseball caps.
Instructions: Enter your answers as whole numbers.
a. What quantity of baseball caps will domestic suppliers supply to domestic consumers?
thousand
b. What quantity of baseball caps will be imported?
thousand
Now suppose a tariff of €1 is levied against each imported baseball cap.
c. After the tariff is implemented, what quantity of baseball caps will domestic suppliers supply to domestic consumers?
thousand
d. After the tariff is implemented, what quantity of baseball caps will be imported?
thousand
Homework Answers
a. 20 thousand.
If we look at the initial demand and supply curves at the price per cap of €2, we can see that the domestic suppliers supply 20 thousand caps to domestic consumers.
b. 80-20 = 60 thousand caps will be imported
Since there are no import restrictions, the quantity demanded of baseball caps is 80 thousand and out of that 20 thousand is supplied by domestic suppliers. Therefore, foreign suppliers supply the amount that is left to be supplied to satisfy the full quantity demanded.
c. 30 thousand
The tariff of €1 raises the price per hat to €2 + €1 = €3. So at a price per hat of €3, the quantity supplied by domestic suppliers is 30 thousand.
d. 70-30 = 40 thousand
The total quantity of hats demanded is 70 thousand at a price of €3, out of which 30 thousand is supplied by domestic suppliers. Therefore, 40 thousand is imported.
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