Question

30 25 20 Pwfl+t) 15 Pw 10 0 10 20 30 40 50 60 70 80 90 100 Q -jets Suppose the world market price of jets is P 10 but that economic policy initia What is the closed economy market equilibrium price and quantity of of jets? P all jet If imports are allowed at Pr = 10 , how many jets would be imported? o and domestic produced supply indicate domestic demand on the horizontal axis on the graph above at this P 10 free trade equilibrium (e-g. indicator lines and label intersections with horizontal axis at o and ) What is the total deadweight loss with a total ban on the import of jets, measured in million dollars (hint: the area of a right triangle is ½ it's base times its height). million. Suppose jet imports are now allowed with a 50% tariff Indicate new domestic demand s with and domestic supply this tariff. LABEL THE DIAGRAM: label the following areas above: F- increase in producer surplus; T-tariff revenue, R-DWL from extra domestic resource cost; G-DWL from lost consumption. Production subsidy: Suppose that instead of a tarif he government allowed imports in at the world market but paid domestic producers a production subsidy of S5 million for every jet they made. What final price do domestic consumers pay in this subsidy setting (in Smillion per What is the total cost of the subsidy program to the government (in Smillion)? Import quota: Suppose the government instead now imposes an import quota (via a system of licenses) that limits the number of jet planes that can enter the market to just 20 jet planes. What will be the domestic supply of jets:

Answer 1

If the economy were a closed one, the equilibrium would be at the intersection of demand and supply curves. Thus equilibrium quantity would be 50 and equilibrium price would be 25.

If imports were allowed, the import quantity at Pw=10, would be difference between the domestic quantity demanded and domestic quantity supplied( i.e. 80-20)= 60 jets.

Qo^D would be at 80 on the horizontal axis, where world price line intersects domestic demand curve. The Qo^S would be 20, where domestic supply curve intersects the world price line at Pw=10.

The deadweight loss due to total import ban is the area of the triangle enclosed by demand, supply curves and Pw= 10 line

Therefore, deadweight loss= 1/2×(25-10)× (80-20)= 1/2×15×60= 15×30= 450. Thus total deadweight loss is 450.

The after tax on import price would be Pw(1+t)= 15. The new equilibrium quantity supplied in domestic market would be 30 nad demand would be 70. The deadweight loss has been labeled in picture below-

After the production subsidy, the price would be same as in the case of import tarrif, i.e. 15 million per jet

P a+t 20 30

The quantity supplied by domestic market would be 30.

Government cost would be the area given by rectangle marked as T in the above picture ( in previous case, it was tarrif revenue) , the cost thus equal to (length*breadth of rectangle) = (70-30)*(15-10)= 40*5= 200.

Import Quota: After import Quota, the maximum the domestic consumers can import is 20. Thus, difference between Q^D and Q^S domestic would be 20. This is true when quantity demanded in domesticat market is 60 and supplied is 40, so that import is 20. And price is 20 too.

Thus domestic quantity supplied is 40.

Note: all prices are in million dollars.