Question

33. The following diagram shows the domestic demand and supply curves for sunglasses. Assume that the world price for sunglasses is $10 per unit. 60 50 45 40 35 30 20 15 10 200 400 600 800 1000 Part : 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 S5 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

From the given graph, is clear that the equilibrium price is S30 and quantity of sunglasses is 400 where demand equals to the supply with no trade If country allows free trade, at world price of S10 per unit, the domestic consumers will demand 800 sunglasses and producers will produce 0 outputs Thus, the imports are (domestic demand - domestic production 800-0 800) Calculation of consumer surplus: CS 0.5*height*base CS 0.5 *(50 10)*(0 800) CS 16,000 Producer surphus is zero, because production is zero. Thus, total surplus is (CS + PS = 160000 + 0-16000) after trade. 3.

Suppose there is concern about displaced domestic sunglasses workers and some politicians have argued to impose a tariff such that all former domestic sunglasses manufacturers will reopen. This argument is can be called as Trump tariff. When country imposes a S5 per unit tariff, the new price will be (world price + tariff- $10+ S5 S15). At this price, the country will produce 100 sunglasses and demand 700 sunglasses. Thus, the imports are (700 100 600 sunglasses) Calculation of consumer surplus after tariff: CS 0.5*(50 15)*0 700) CS $12250 PS 0.5*(15 10)*(0 100) PS S250 Total surplus CS PS Total surplus = $12250+ 250 Total surplus = $12500 Calculation of government revenue:

Government revenue- (15-10) (700 100) Government revenue- $3000 Dead weight loss = 0.5*(15-10)*(0-100) + 0.5*(15-10)*(700-800) DWL 500 1