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Lecture 6

Economics 2151B - Lecture 6.docx

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Economics 2150A/B
Kristin Denniston

Economics 2151B Wednesday January 22 Lecture 6 Homework 1 • Due tonight on OWL under ‘Tests and Quizzes’ • For the last 3 problems on your homework assignment, you can use exercise 10.6 as a reference Figure 10.16 • With a quota, we restrict the amount of imports to equal a certain restricted amount o The graph for a quota is identical to a graph for a tariff o The DWL under the quota system is the entire trapezoid • In order to support a price of $6, under a tariff we have to add a $2 tax on every unit imported into the country o We start out with a world price of $4 + $2 tax = $6 • 3 Cases to Consider: 1. No trade equilibrium (don’t allow imports from the rest of the world) • The domestic producers are producing the product • The domestic consumers are consuming the product • The domestic price would be $8, and the domestic quantity purchased would be 6 units 2. Free trade equilibrium (allowing people to freely buy and sell goods across the border) • Consumers will now pay the world price ($4) for the good • Consumer surplus increases because consumers are consuming at a lower price • Producer surplus falls for domestic producers, and only a few producers supply the product • Quantity demanded is much higher than the quantity supplied at this price 3. Tariff equilibrium • To support a higher domestic price and increase our producer surplus, the government applies a tariff • This raises the world price from $2 to $6 • The government collects tax revenue from the tariff ($2 per unit for every import after the tariff has been implemented) • The DWL shrinks to G + K (it is smaller under the tariff than under the quota because the government makes back some of that money by charging a tax) Problem 10.24 d d P s 110 – Q s P = 10 + Q P = $30 3 Policies: 1) The government decides to ban imports of chips (no trade equilibrium) • Q = Q (not allowed to import) • Q = 110 – P (demand curve in its ordinary form) s s d • Q = P – 10 = 110 - P • P = 60 • Q = 60 – 10 = 50 • We have a price of $60/unit, and 50 units are consumed in our economy. 2) Foreign suppliers are allowed to import computer chips with no tariff (free trade equilibrium) • Thd domestic price falls to the world price of $30 • Q = 110 – 30 = 80 units • Q = 30 – 10 = 20 (domestic supply) • Our producers will supply 20 units, and imports will equal 60 units. • The quantity consumed domestically is 80 units, and the quantity produced domestically is 20 units. 3) We will implement a tariff, which will equal $10/unit (tariff equilibrium) • The domestic price will rise by $10, so consumers now pay $40 (world price + tariff price per unit) • Q = 70 s • Q = P – 10 = 30 • The quantity consumed is 70 units, and the quantity supplied is 30 units.
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