H.Edris, Baisah T.

ECN138-Xx
Quiz 3

Q1. Assume the Philippines is an importer of television in the United States. Consumers buy
800,000 televisions per year, half of which are produced domestically, and half imported.
Assume that the world price is $150 each television. If there were no televisions sold, a local
consumer’s willingness to buy is $400 and the costs to sellers is $100.
A. Draw a diagram showing the world price, market supply and market demand for
television in the local market.

Price
($ per TV)
$400

E Sd (domestic supply curve)

$150 World Price

$100
Dd (domestic demand curve)

0 Quantity
D0= 800k (Thousands of TV/yr)

B. Show and calculate consumer and producer surplus at the world price. Show all the
required solutions.

Solution:
Producer surplus = 10,0000,000

 150-100 x 400k/2 = 10,000,000

Consumer surplus = 100,000,000
  400-150 x 800k/2 = 100,000,000

C. Suppose the Philippine government restricts the important of television by putting a 20

percent tariff rate. Suppose this tariff rate leads to a fall of the consumers demand to
700,000 televisions each year, and local producers supply 500,000 each year. Illustrate
these changes in your diagram above. How many televisions should the company
imports? Calculate the change in consumer surplus, producer surplus and total surplus.

Price
($ per TV)
$400

$180 Domestic price with Tariff Sd (domestic supply curve)

Tariff
$150 World Price

$100
Dd (domestic demand curve)

0 Quantity
Qs= 500k Qd= 700k Qd= 800k (Thousands of TV/yr)

Shaded area is = Producer’s gain from tariff = 20,000,000

Solution:

Producer’s surplus without tariff 150-100 x 400k/2 = 10,000,000

Producer’s surplus with tariff 180-100 x 500/2 = 20,000,000
Hence, the producer’s gain from tariff is = 100,000,000

Consumer’s surplus without tariff 400-150 x 800K/2 = 100,000,000

Consumer’s surplus with tariff 400-180 x 700k/2 = 77,000,000
Hence, the consumer’s loss from tariff is = 23,000,000

D. Calculate the government revenue raised and the national loss of a tariff in (C).
Answer:
Consumer’s loss……………………… 23,000,000
 Producer Gain………………………… 10,000,000
Government collects…………………… 6,000,000
Net national loss from tariff…………...7,000,000

Q2. When China’s clothing industry expands, the increase in the world supply lowers the world
prices of clothing. What is the effect of this on the welfare of consumers and producers of a
nation that imports clothing such as the Philippines? You may use a diagram to answer this
question.
Answer:

The above fig shows the import market for clothing in the Philippines. The quantity of
clothing imported is shown on the x-axis while the price is on the y-axis. Suppose the import
market was at equilibrium point E with price level P before lowering clothing price in the
international market. At this price level, the imported quantity of clothing is Q. In the fig, the
consumer surplus is the area (adc), producer surplus is the area (dcb), and total surplus is the
area (abc). After the fall in the international price of clothing, the supply of imported quantities
will increase for each price level in the domestic market of the Philippines. The supply curve will
shift position from S to S1, as depicted in the figure. The shift causes a new equilibrium point E1
with price level P1. The change in the price level from P to P1 shows the fall in clothing prices in
the domestic market. Also, the quantity of imported clothes has increased from Q to Q1.
 The area of consumer surplus has increased from (adc) to (aig), which shows that the
consumer surplus has increased.
 The area of producer surplus has increased from (dcb) to (igf), which shows that the
consumer surplus has increased.
 The area of total surplus has increased from (abc) to (agf), which shows that the
consumer surplus has increased.