Question

1. Assume we divide up the world into two regions: the United States and the rest of the world. We will examine the competitive market for simple 2 GB flash drives and the trade between the United States and the rest of the world.

We know the supply and demand conditions in each region, which are summarized below:

Rest of the World:

            Supply curve: P=3+Qs P: Price of flash drives Qs: Quantity of flash drives supplied (millions)

Demand curve: P=12-2*Qd Qd: Quantity of flash drives demanded (millions)

           United States:

            Supply curve: P=2+2*Qs

            Demand curve: P=17-Qd

With that information, you find that the equilibrium price of flash drives is P*=$6 in the rest of the world before trade opens, and Q*= 3 (million) flash drives will be produced and sold. In the United States, the equilibrium price of flash drives is $12, and Q*=5 (million) flash drives will be produced and sold before trade opens.

Please use the information above to answer the following questions, and please show your work.

1. Plot the supply and demand curves for the United States before trade opens on a supply and demand diagram. Please clearly indicate the equilibrium price and quantity of flash drives before trade opens and label where each of the supply and demand curves intersect the vertical axis. (8 points)

2. Compute consumer surplus, producer surplus, and total surplus for the United States before trade opens. (6 points)

3. Now, assume trade opens between the United States and the rest of the world. Which country will export flash drives? Which country will import flash drives? Why? (4 points)   
4. Compute the export supply curve for the international market. Hint: use the excess supply for the exporting country. (6 points)

5. Compute the import demand curve for the international market. Hint: use the excess demand for the importing country. (6 points)

6. Compute the equilibrium world price and quantity of flash drives traded after trade opens, assuming that there is no tariff. (8 points)

7. Compute the number of flash drives produced (supplied) and the number of flash drives sold (demanded) once trade opens in the United States. Hint: use the world price that you computed from part f. (6 points)
   

8. Compute the consumer surplus, producer surplus, and total surplus in the United States once trade opens. Do consumers in the United States gain from trade? Do producers in the United States gain from trade? Does the United States gain overall from trade? (10 points)

1. Assume that the United States imposes a $1 tariff on imported flash drives. Assume the rest of the world does not change its trade policy in response. Compute the equilibrium price, quantity supplied, and quantity demanded in the United States once the tariff is put into place, assuming that the United States is a large country and influences world prices with its trade policy. (12 points)

10. Compute total surplus in the United States with the tariff. Does the United States gain overall from imposing this tariff? Hint: remember tax revenue in total surplus. (8 points)

11. Why might the United States not want to impose the tariff on flash drives, even if it would increase total surplus according to the model? List at least two reasons. (6 points)

Answer 1

According to HomeworkLib policy i have done only 5 sub parts