1. Use the following information to answer the questions below. Please note that output of good X is measured in 100’s on the x axis, i.e. if you find Q = 10 then output is 10 × 100 = 1, 000 units. You must have a diagram to support you answers.
• Domestic Demand: P = 200 − 2Q
• Domestic Supply: P = 40 + 2Q
• Domestic Supply and Imports: P = 2Q
(a) Solve for equilibrium price and output in Autarky.
(b) Find the value of the consumer and producer surpluses in Autarky.
(c) Solve for equilibrium price when the country imports good X from abroad. How many units will be imported?
(d) Find the new values of the consumer and producer surpluses.
(e) Suppose the government imposes a $10 specific tariff on all imports of good X. What is the new price? How many units will consumers demand? How many units will be supplied by domestic producers? What is the value of the revenue collected by government.
2. Assume that Mexico places a tariff of 10% on all imported TVs. Mexico produces its own TVs but imports TV components valued at 50% of the cost of producing TVs. Use this information to answer the following:
(a) Find the ERP for each of the following tariffs on imported components; 5%, 10% and 15%.
(b) Repeat the exercise above assuming that the value of imported components is now 70% of production costs. Compared to the answers you got in part a, what can you say about the amount of protection that domestic producers receive when the tariffs on components change and when imported components as a percentage of production costs change, e.g. given a 10% tariff on components compare the ERPs when a = 50% and a = 70%. Draw conclusions based on what you have seen.
3 answers