--%>

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 : Assumption of economic model-financial

    Most of the economic models suppose that the financial goal of a corporation is the maximization of the value of: (1) Firm’s net revenue. (2) Accounting gains to the firm. (3) Firm to its shareholders. (4) Progress of the sales revenues. (5) Monetary advantages

  • Q : Illustrate ready-to-eat cereal industry

    Brands of ready-to-eat cereal by Kellogg, Post, General Mills and Quaker [for example Frosted Flakes, Raisin Bran and Cheerios] account for more 85 percent of all breakfast cereals sold. Here the ready-to-eat cereal industry is an illustration of: (w)

  • Q : Accused of predatory pricing in

    Wal-Mart business practices have been criticized like destroying small town America. Therefore argument is that Wal-Mart will build a new store and firstly set prices so low that they ultimately drive off all rival businesses. As per its foes, after their rivals move

  • Q : Law of Supply in quantity supplied The

    The law of supply defines that higher prices cause rise in the: (i) Demand for good. (ii) Supply of the good. (iii) Quantity supplied. (iv) Gains of investors. Can someone please help me in finding out the accurate answer from the

  • Q : Economics like a social science Why is

    Why is economics seen like a social science?

  • Q : Firms and Transaction Costs An

    An individual or organization which simultaneously purchases low and sells high in various markets is a/an: (i) Angel duster. (ii) Escalator. (iii) Arbitrageur. (iv) Finagler.  (v) Optimizer. Can someone please help me in find

  • Q : Moral Hazard-Risk of money When you

    When you paid a friend’s entrance fee for the poker tournament and agreed to divide any winnings and then your friend played sloppily as your money is at risk, not his, and then you have suffered since of: (1) Adverse selection. (2) Fraudulent information. (3) I

  • Q : Determine economic rent by annual income

    The philosophers in this demonstrated graph are enjoying economic rent equal to: (w) shaded area A. (x) shaded area B. (y) shaded area C. (z) the sum of the shaded areas.

    Q : Changing in marginal cost without price

    When this firm's marginal cost curve moved upward from MC2 to MC3, the firm would: (w) reduce output from Q3 to Q2 and increase price from P3 to P4. (x) reduce output by Q2 t

  • Q : Economic profit of purely-competitive

    This purely-competitive lumber mill experiences on the average day is an: (w) economic profit of about $340. (x) economic loss of roughly $150. (y) accounting profit of less than $300. (z) accounting loss of more than $100.

    Discover Q & A

    Leading Solution Library
    Avail More Than 1435569 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads
    No hassle, Instant Access
    Start Discovering

    18,76,764

    1943099
    Asked

    3,689

    Active Tutors

    1435569

    Questions
    Answered

    Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

    Submit Assignment

    ©TutorsGlobe All rights reserved 2022-2023.