--%>

Problem on free trade equilibrium

The domestic demand curve for portable radios is provided by Qd = 5000 − 100P, here Qd is the number of radios which would be purchased whenever the price is P. The domestic supply curve for radios is provided by Qs = 150P, where Qs is the amount of radios which would be generated domestically when the price were P. Assume that radios can be received in the world market at a price of $10 per radio. The Domestic radio producers have effectively lobbied Congress to oblige a tariff of $5 per radio.

a) Sketch a graph stating the free trade equilibrium (with no tariff). Clearly state the equilibrium price.

b) By how much would tariff rise producer excess for domestic radio suppliers?

c) How much would govt. collect in tariff revenues?

d) Determine deadweight loss from the tariff?

E

Expert

Verified

a)

162_1.jpg

In free trade equilibrium, domestic demand is 4000, domestic supply is 1500, and import is 2500 units.

b) The producer excess with free trade would be 1/2(10-0)(1500). With the tariff, domestic supply will raise to 2250 and producer surplus will raise to 1/2(15-0)(2250) = 16875. Therefore producer surplus will rise by 9,375.

c) Through tariff, domestic demand will drop to 3500 units and domestic demand will rise to 2250 units.  Therefore, 1250 units will be imported.  The tariffs of $5 on each of such units will outcome in government receipts of 6,250.

d) The deadweight loss from tariff will come from two sources. First, the deadweight loss is related overproduction of domestic suppliers will be 1/2 (2250-1500)5 = 1875. Second, the deadweight loss is related with the reduction in consumption by consumers due to the tariff is 1/2 (4000-3500)5 = 1250.  Thus, the total deadweight loss with this tariff is 3,125.

 

   Related Questions in Microeconomics

  • Q : Decreases in market demand of

    Decreased market demand for generic bricks would result in a(n) ___________ in the price of bricks and a(n) ___________ in this brickyard’s profit-maximizing output. (w) increase; decrease. (x) increase; increase. (y) decrease;

  • Q : Determine present value by interest rate

    When the annual interest rate is 12 percent and a rental house can be expected to rent perpetually for price of $1,000 monthly, in that case the house has a present value of approximately: (1) $240,000. (2) $144,000. (3) $100,000. (4) $72,000. (5) $12

  • Q : Explain about minimum legal price A

    A minimum legal price is called a price: (1) floor. (2) guarantee. (3) foundation. (4) stabilizer. (5) subsidy. I need a good answer on the topic of Economic problems. Please give me your suggestion for the same by

  • Q : Economic profit at average total cost

    When a monopolist maximizes profit with producing where average total cost is on its minimum, this: (w) should generate an economic profit. (x) should sell at a price equal to marginal cost. (y) will incur an economic loss. (z) will p

  • Q : Investor Optimism for Loanable Funds An

    An increase within investor optimism will cause: (w) interest rates to rise. (x) slower technology advances. (y) slumps in business construction. (z) interest rates to fall. Please choose the right answer from abov

  • Q : Benefit of the market system One

    One political benefit of the market system over the majority of other economic systems is that: (1) The power to take decisions is comparatively decentralized. (2) Democratic decisions are steadier than individual selections (3) Centralized decisions

  • Q : Marginal revenue-product of the labor

    The monopsonist will hire labor till labor's marginal resource cost equivalents the: (p) The value of average product of labor. (q) Price of labor. (r) Marginal revenue product of labor. (s) Marginal physical product. Choose the ri

  • Q : Labor Unions-jurisdictional strikes

    Preceding to the merger of the American Federation of Labor and Congress of Industrial Organizations to the AFL CIO merger in year 1955: (1) The AFL was an alliance of the industrial unions. (2) The CIO was an alliance of the craft unions. (3) Jurisdictional strikes o

  • Q : Competition in the long run Economic

    Economic profits produce competitive pressures which raise the industries: (w) price for output. (x) output and number of firms. (y) exit rate for established firms. (z) monopoly power in its largest firms. Hey fri

  • Q : Example of predatory behavior Assume

    Assume that a new Wal-Mart is built just outside a small town, and also Wal-Mart aggressively cuts prices therefore much that the rivals close their doors. In that case, once its rivals exit the market, the Wal-Mart raises prices significantly. Wal-Ma