4) Suppose that the domestic market for memory chips is perfectly competitive. D

Question

4) Suppose that the domestic market for memory chips is perfectly competitive. Domestic demand is = 100-P and domestic supply is given by Q-4P The world price for a memory chips e world market is very large compared to the domestic market, and the world suppliers are willing given by S10. Th to supply any quantity of chips in the domestic market at the prevailing world price. All (domestic and foreign) memory chips are homogeneous a) If this market is closed to foreign trade, what will be the equilibrium price and quantity? b) If this market is open to free trade (no trade restrictions of any type), determine: i) domestic quantity demanded of memory chips ii) dometic quantity supplied of memory chips ii) imports of memory chips c) What happens memory chips? to the level of imports when a tariff of $4 per memory chip is imposed on imported d) Draw a diagram of this market. What is the deadweight loss from the tarift? What are the tariff collections?

Explanation / Answer

a)

Qd = 100 - P

Qs = 4P

at equilibrium

Qd = QS

100 - P = 4P

100 = 5P

P = 20

Q = 4(20)

= 80

b)

Pw = world price for memory chips

Pw = 10

(i)

domestic quantity demand Qd = 100 - 10

= 90

(ii)

domestic quantity supplied Qs = 4(10)

= 40

(iii) imports = Qd - Qs

= 90 - 40

= 50

c)

tariff t =4 then Pw + t = 10 + 4

= 14

Qd = 100 - 14

= 86

Qs = 4(14)

= 56

imports = 86 - 56

= 30

so imports has reduced dy 20

d) DWL = 1/2((56-14)(14-10) + 1/2(90- 86)(14-10)

= 32 + 8  

= 40

Tariff collection = 4(30)

= 120

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