1. T he world producer price for baseballs is $24 per dozen, and almost all of t
ID: 1109715 • Letter: 1
Question
1. T he world producer price for baseballs is $24 per dozen, and almost all of them are produced outside the United States. Suppose the US demand curve is Op 100,000 -2,000P, where P is the price per dozen and Q is measured in dozens. The US domestic supply curve is Q =-10.000 + 1.000P. a. Before a tariff is imposed, what is the US equilibrium price? Domestic consumption? Domestic production? Imports? b. Congress has decided to help the baseball manufacturing industry by imposing a tariff of S6 per dozen. What are the new equilibrium price, domestic consumption, domestic production, and imports? c. What are the losses to US consumers gains to US producers and deadweight loss? d. What quota level would have the equivalent affect on price as the $6 tariff? e. What is the deadweight loss from the quota?Explanation / Answer
(a) Before tariff,
US equilibrium price = World price = $24.
At this price,
Domestic consumption (QD) = 100,000 - (2,000 x 24) = 100,000 - 48,000 = 52,000
Domestic production (QS) = - 10,000 + (1,000 x 24) = - 10,000 + 24,000 = 14,000
Import = QD - QS = 52,000 - 14,000 = 38,000
(b) After tariff,
US equilibrium price = World price + Tariff = $24 + $6 = $30
At this price,
Domestic consumption (QD) = 100,000 - (2,000 x 30) = 100,000 - 60,000 = 40,000
Domestic production (QS) = - 10,000 + (1,000 x 30) = - 10,000 + 30,000 = 20,000
Import = QD - QS = 40,000 - 20,000 = 20,000
(c)
Consumer surplus (CS) = Area between demand curve and market price
From demand function, When QD = 0, P = 100,000 / 2,000 = $50 (Maximum price)
Before tariff, CS = (1/2) x $(50 - 24) x 52,000 = 26,000 x $26 = $676,000
After tariff, CS = (1/2) x $(50 - 30) x 40,000 = 20,000 x $20 = $400,000
Loss in CS (Loss to consumers) = $(676,000 - 400,000) = $276,000
Producer surplus (PS) = Area between supply curve and market price
From supply function, When QS = 0, P = 10,000 / 1,000 = $10 (Minimum price)
Before tariff, PS = (1/2) x $(24 - 10) x 14,000 = 7,000 x $14 = $98,000
After tariff, PS = (1/2) x $(30 - 10) x 20,000 = 10,000 x $20 = $200,000
Gain in PS (Gain to producers) = $(200,000 - 98,000) = $102,000
Tariff revenue = Unit tariff x Import = $6 x 20,000 = $120,000
Deadweight loss ($) = Loss in CS - Gain in PS - Tariff revenue = 276,000 - 102,000 - 120,000 = 54,000
(d)
A quota will restrict the amount of import to the import level when tariff is imposed. When tariff is $6,
Import = 20,000 units
This is the equivalent quota level.
NOTE: As per Chegg answering guideline, 1st 4 parts are answered.
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