Steel is produced only in the US and the rest of the world (ROW). The inverse de

Question

Steel is produced only in the US and the rest of the world (ROW). The inverse demand and supply in the US are and 120 QU 40 while in the ROW, they are p 80 and p QB All quantities are in millions of tons and all prices are in dollars per ton. Since steel is produced more cheaply in the Row, the US imports it from the ROW under international trade. At any price, p, the imports of the US, QM, s the excess demand for steel given by the difference between the quantity demanded and the quantity supplied domestically in the U QM Qi Q Similarly, the exports of the ROW, QE s the excess supply of steel given by the difference between how much they produce and how much they demand: QE QK QA.

Explanation / Answer

In US

Qd=120-P and Qs=P-40

At equilibrium: Qd=Qs. Putting these down functions in equality we get:

120-P=P-40

or the equilibrium price is: $80 per ton or Pu= $80 per ton

In Rest of the World(ROW)

Qd=80-P and Qs=P

At equilibrium: Qd=Qs

So we get 80-P=P and

The equilibrium price PROW is $40 per ton.

Now we can see that the PROW(40) < Pu.

US thus imports from the ROW at cheaper prices.

Part c

US imposes a tax of %

$16 per ton making the import price = 40+16=$56 per ton of imports.

Domestically in US the quantity demanded at this pice is 64(By putting P=56 in Qd= 120-P)

while the quantity supplied at this price is 16(by putting P=56 in Qs= P-40)

QM = 64-16= 48(Domestic Qd -Qs) units or million tonnes.

Thus

P**= $56 per ton

Q**= 48 million tonnes

Next

at this new price of $56, the demand in ROW falls to 24 mn tonnes (substitute 56 in Qd of ROW) and that of US is 64 mn tonnes.

US 64 million tonnes

ROW=24 million tonnes

Part d

US buyers pay $56 per ton

$0 more than before(because they we paying $80 before trade so paying $24 less than before)

US sellers receive $56per ton

$0 more than before ( Because they were getting $ 24 more than now before trade)

The ROW sellers receive $56 per ton less the tax of $16 i.e. $40 per ton

$0 per ton more than before. The ROW buyers pay $40 per ton,

which is $0 per tonne less than before.

Part e

Consumers surplus= Max price the consumer is willing to pay for a given unit less the amount he finally pays for it . A lateral summation of it gives the total consumer surplus.

The max that the consumers are willing to be for the product is $80 but they finally pay only $56 i.e. per unit consumer surplus is $24. The total units purchased are 64,000,000. so the total consumer surplus is $24 X 64 mn tonnes= $1536 mn

Producers surplus is the difference between the price that the seller gets for the unit less minimum price at which the sellers are willing to sell the product. A lateral summation of the same gives the total producers surplus.

So here the producers surplus would be = -$24 X 16,000,000= $384mn.

US tax revenue = 24,000,000(exportable surplus form ROW) X 16= 384mn

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