ECO101A: TUTORIAL PROBLEM SET-07(SOLUTION)

QUESTION NO 1

QUESTION NO 2
QUESTION NO 3
QUESTION NO 4
QUESTION NO 5
QUESTION NO 6
Q7. Tariffs and Quotas

The domestic demand and domestic supply curves for CD players in a small closed economy are as
follows:

Supply: P  2QS  2

Demand: P  QD  32

I. Closed Economy (no trade)

a. Calculate the value of consumer surplus (CS) and producer surplus (PS) for the CD player market
in this small closed economy. CS = __$50_, PS = __$100_.

Solution:

Set the supply function and demand function equal; 2Q  2  Q  32  Q  10

P  2Q  2  22

Use 1 bh formula to calculate the area of CS and PS (Remember that CS and PS are measured in
2
dollars).

CS = 1 (32  22)(10)  50
2
1
PS = (22  2)(10)  100
2

II. Open Economy with Free Trade.

Use the following information to answer question a) ~ d). Suppose that this small closed economy is
open to free trade and that the world price is $10 per CD player.

a. With free trade, what is the quantity supplied by domestic producers?

_4______
 Solution: Plug the PWorld = $10 into the domestic Supply equation: P  2QS  2
10  2QS  2  8  2QS  QS  4

a. With free trade, what is the quantity demanded by domestic consumers? __22__

Solution: Plug the PWorld = $10 into the domestic Demand equation: P  QD  32
10  QD  32  QD  22

b. With free trade, how many CD players will the country import or export?
_They will import 18 units__

Solution: At PWorld = $10, Qd = 22, and QsDom =4, there is a shortage of 18 units of CD players, and
thus we will need an import = 22 - 4 = 18 units of CD players to fulfill the excess quantity
demanded.

c. Calculate the value of consumer surplus (CS trade) and producer surplus (PS trade).
CStrade = _$_242_ and PStrade = $_16__.

1
Solution: use bh formula to calculate the area of CS and PS. (Remember that CS and PS are
2
measured in dollars.)

1
CStrade = (32  10)(22)  242
2
1
PStrade = (10  2)(4)  16
2

III. Open Economy with Tariff

Use the following information to answer question a) ~ i). Suppose that the government imposes a
tariff of $4 on each imported CD player, and the world price is $10 per CD player.

a. What is the quantity supplied by domestic producers after the introduction of the tariff?
_____6_______.
Solution: Calculate the PTariff = PWorld + Tariff = $10 + $4 = $14. Plug the PTariff = $14 into the
domestic Supply equation: P  2QS  2
14  2QS  2  12  2QS  QS  6

b. What is the quantity demanded by domestic consumers after the introduction of the tariff?
______18________.
 Solution: Plug the PTariff = $14 into the domestic Demand equation: P  QD  32
14  QD  32  QD  18

c. How many CD players will the country import or export after the introduction of the tariff?
They will import 12 units after the imposition of the tariff.

Solution: At PTariff = $14, Qd = 6, and QsDom =18, there is a shortage of 12 units of CD players, and
thus we will need an import = 18 - 6 = 12 units of CD players to fulfill the excess quantity
demanded.

d. Draw a graph and shade the areas of the consumer surplus (CS tariff), the producer surplus (PS
tariff
), the total tariff revenue (TR tariff), and the deadweight loss (DWL) after the introduction of
tariffs.

e. Calculate the value of consumer surplus (CS tariff) and the value of producer surplus (PS tariff) for
the CD player market after introducing the tariff.
 CS w/Tariff = __$_162___ and PS w/Tariff = __$_36___.

1
Solution: use bh formula to calculate the area of CS and PS.
2

1
CSTariff = (32  14)(18)  162
2
1
PSTariff = (14  2)(6)  36
2

f. Calculate the value of total tariff revenue (TR tariff ). Tariff Revenue = __$48__.

Solution: total tariff revenue = (tariff per unit)  (quantity imported) = $4  12  $48 .

g. Calculate the value of the deadweight loss (DWL). DWL = ____$12_____.

1
Solution: DWL is equal to the summation of the two grey triangular areas by using bh formula .
2
1 1
DWL = (6  4)(4)  (22  18)(4)  4  8  12
2 2