Question

3. The following diagram shows the domestic demand and supply curves for sunglasses. Assume that the world price for sunglasses is S10 per unit. 60 50 45 40 35 30 20 15 10 200 400 600 800 1000 Part 1: With no trade allowed, what are the equilibrium price and equilibrium quantity for sunglasses? Part 2: If the country allows free trade, (a) how many sunglasses will domestic consumers demand and how many sunglasses will domestic producers produce? (b) Will the country import or export sunglasses, and, if so, how many sunglasses will be imported/exported? (c) What is total surplus after trade is allowed? Part 3: Suppose there is concern about displaced domestic sunglass workers and some politicians have argued to impose a tariff such that all former domestic sunglass manufacturers will reopen. (a) Using a concept discussed in this unit, What is the name of the argument that supports imposing a tariff in this situation? (b) Suppose the country imposes a $5 per unit tariff. How many sunglasses will be imported after the tariff is imposed? (c) After the government imposes the tariff, what is government revenue, total surplus, and deadweight loss? d) Identify the deadweight loss in the model.

Answer 1

60 50 45 40 35 30 25 20 15 10 Denund 200 400 600 800 1000

Part I

With no trade allowed,the equilibrium price is 30 and the equilibrium quantity is 400

Part II

When the free trade is allowed, Domestic consumers will demand 800 units whereas domestic producers will produce 0 quantity

The country will import because the world price is lower than the domestic price

Imports = 800 units

Total surplus = Consumer surplus = 0.5*800*(50-10) = 16000

Part III

When a tariff of $5 is imposed,the price will be 15

Domestic demand is 700 and domestic supply is 100 so imports = 700-100 = 600 units

CS=0.5*700*(50-15) = 12250

PS=0.5*100*(15-10) = 250

GR=(700-100)*(15-10) = 3000

DWL = Shaded area in the graph above = 2*[0.5*100*(15-10)] = 500