Question -
1. Romia is a small, closed economy that produces pianos. Currently the domestic demand for pianos in Romia is given by the equation P = 2000 - 2Q while the domestic supply for pianos in Romia is given by the equation P = 200 + 4Q.
a. Given the above information calculate the equilibrium price and equilibrium quantity in the market for pianos in Romia. Then, calculate the value of consumer surplus (CS) and producer surplus (PS).
Suppose that Romia is considering opening its piano market to trade and that the world price of pianos is $1500.
b. Given this information, analyze the effect on Romia of opening its piano market to trade. In your answer be sure to comment on how this decision will impact imports or exports of pianos in Romia while also commenting on how many pianos domestic consumers will purchase if the market opens to trade and how many pianos domestic producers will produce if the market opens to trade. In addition, calculate the values of CS with trade and PS with trade.
c. Is opening this market to trade beneficial for Romia? Fully explain your answer to this question.
Suppose that Romia is considering opening its piano market to trade and that the world price of pianos is $800.
d. Given this information, analyze the effect on Romia of opening its piano market to trade. In your answer be sure to comment on how this decision will impact imports or exports of pianos in Romia while also commenting on how many pianos domestic consumers will purchase if the market opens to trade and how many pianos domestic producers will produce if the market opens to trade. In addition, calculate the values of CS with trade and PS with trade.
e. Is opening this market to trade beneficial for Romia? Fully explain your answer to this question.
Now, suppose the market for pianos in Romia is opened to trade and the world price is $800 per piano. Use this information and the equations for the domestic demand and domestic supply curves to answer the net set of questions.
f. Given this information, suppose you are told that the government has enacted a tariff that resulted in the government receiving $60,000 in tariff revenue. By how much did the tariff raise the price of pianos given this information? Hint: if you do this correctly you should find that there are two different tariffs that Romia could apply in this market to get this level of tariff revenue.
g. Given your two answers in (f) go back and calculate the value of imports under each tariff price and then prove numerically that both tariffs result in tariff revenue of $60,000.