PLEASE ANSWER THE LAST TWO QUESTIONS d) AND e) For credit, clearly show your cal

Question

PLEASE ANSWER THE LAST TWO QUESTIONS d) AND e)

For credit, clearly show your calculations and state the assumptions you made.

14. Refer to the following figure. Domestic Supply 14 Price-World+Taritf World Price Demand 10 40 60 80 100 widgets a) In the absence of trade, how many Widgets does this country produce and consume? b) In the absence of trade, what is the country's consumer plus producer surplus? c) With free trade and no tariffs, what is the quantity of Widgets imported? d) With a specific tariff of S3 per unit, what is the quantity of Widget imports? What is the loss of Consumer Surplus due to the tariff? e) What is the lowest specific tariff which would be considered prohibitive?

Explanation / Answer

(d) Specific tariff of $3 per unit , the quanity of widget imports will decline to (80-40) = 40 widgets because when there is no tariif then the quanity of widgets imported = (100-10) = 90 widgets.

Loss in consumer surplus = $230 because when there is no tariff then world price = $3 and quanity = 100 widgets consumed. So , the consumer surplus will be area under the demand curve and above the price line $3 i.e ,

= (0.5) (100)(14-3) = $550.

Now, when there is tariif , price would be = $6 and quantity = 80 widgets consumed. So, consumer surplus will be area under the demand curve and above the price line of $6 i.e , (0.5)(80)(14-6) = $320.

Loss in consumer surplus = $(550-320) = $ 230.

(e) The lowest specific tariif which would be considered prohibitive is $5 per widget. Because for the tariif to be prohibitive , it must raise the post-tariif price to the autarky price. {so, prohibitive tariif must be at least $5 per widget i.e , (autarky price- free trade price). which is $(8-3 )= $5 per widget.

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