Question

2. Variation NL For Country A the dennand and supply for food are given by Qda-520-200P and Qsa =-80 + 100P. respectively. Analogously, Qdb-900-300P and Qsb-600P are the curves for Country B. Using this information answer the following questions, keeping you answers as precise as possible either by working with fractions or using about 5 decimal places. (a) Find domestic equilibria (prices and quantities) before international trade starts. (b) Next, find international trade equilibrium: the international price and the quantity of imports/exports traded in the world markets. Do consumers in Country B benefit from the international trade? Compute the change in consumer surplus there resulting from the international trade. (c) Suppose, the government in Country A imposes an import tariff t = 0.53, in attempt to reduce reliance on food imports and encourage domestic production. Find international trade equilibrium with tariff find Country A's price P+ and Country B's price P, and confirm that the quantity imported by Country A at P+is equal to the quantity exported by Country B at P. (d) Relative to the international trade equilibrium without tariff, what proportion of the tariff is borne (e) Compute the net effect of the tariff fron the food market in Country A, i.e., the gain from the (f) If the government in Country A lowers the tariff to 30 cents. Recompute international trade (g) Relative to the international trade equilibrium without tariff, what proportion of the tariff is borne (h) Finally, recompute the net effect of the tariff from the food market in Country A, .e., the gain from (i) What advice can you give to Country A's government with respect to the tariff size? by consumers in Country A and what proportion is shifted to foreign producers in Country B? improvement in terms of trade minus the deadweigth loss due to distortions caused by tariff equilibrium with tariff. How many units are exchanged in international market as imports/exports? by consumers in Country A and what proportion is shifted to foreign producers in Country B? the improvement in terms of trade minus the deadweigth loss due to distortions caused by tariff

Answer 1

a) For equilibrium in country a, Demand =Supply

or, Q^da=Q^sa

or, 520-200P=-80+100P

or, 300P=600

or, P^a=$2

and Q^a=520-200*2 = 120 units

For equilibrium in country b, Demand = Supply

or, Q^db=Q^sb

or, 900-300P=600P

or, 900P=900

or, P^b=$1

and Q^b=600*1 = 600 units

b) As price of good is lower for country b, it will export and country a will import.

Now, export supply function for country b is X^b=Supply^b - Demand^b = 600P-900+300P = 900P-900

Now, import demand function for country a is M^a=Demand^a - Supply^a = 520-200P+80-100P = 600-300P

For equilibrium,

X^b=M^a

or, 900P-900=600-300P

or, 1200P=1500

or, P=$1.25

At this price, Demand in country a is 520-200*1.25=270 units but supply is -80+100*1.25=45 units. Hence, import quantity =270-45 =225 units.

Due to rise in price country b domestic producers will be benefited. When price is $1.25, Q^db = 900-300*1.25 = 525.Thus, consumer surplus will fall from 1/2*(3-1)*600 = $600 to 1/2*(3-1.25)*525 = $459.375.

c) Now, with import tax, P^a=P^b(1+0.53)=1.53P^b

Then, the new equilibrium will be 900P^b-900=600-300P^a

or, 900P^b-900 = 600-300P^b*(1.53)

or, 1359P^b= 1500

or, P^b=$1.1

and P^a=1.53*1.1 =$1.69=$1.7 approx

Then at the price $1.1, demand in country b is 900-300*1.1 = 570 units and supply in country b is 600*1.1=660 units.

Then, net export is 660-570=90 units.

Similarly, at this price $1.69, demand in country a is 520-200*1.7=180 units and supply in country a=-80+100*1.7 = 90 units. Then, net import is 180-90 = 90 units . Hence, net import = net export.

d) In the diagram below, we need to calculate the shaded area.

个P sA County B 1-2S o 45 120 22o 270 520 525 6oo 756 4Do

Now, before tariff in country a ,consumer surplus rises by 1/2*(2-1.25)*(120-45)+1/2*(2-1.25)*(270-120) = 1/2*0.75*75+ 1/2*0.75*150 = 84.375.

Similarly, before tariff in country b, producer surplus rises by 1/2*(1.25-1)*(600-525)+1/2*(1.25-1)*(750-600) = 1/2*0.25*75+1/2*0.25*150 = 28.125

Ratio required = increase in consumer surplus/ increase in producer surplus = 84.375/28.125 = 3