Question

Suppose the domestic demand for television sets is given by the following demand equation: Qd = 2400- 10P, where P is the price of television sets in dollars. The domestic supply of television sets is: Qs =2P. Finally assume that television sets can be imported at the world price of $160. Suppose the government bans the import of television sets. How much would domestic consumer surplus and domestic producer surplus change as a result of this policy and what would be the deadweight loss? (Show your calculations. Note: A graph is likely to be very helpful in making your calculations.)

Answer 1

Suppose P = 160 then,

Qd = 2400 - 10p

Qd = 2400 - 10(160)

Qd = 2400 - 1600

Qd = 800

Supply Qs = 2p

Qs = 2(160)

Qs = 320

If Government bans the import of television set then in such scenario following will be the circumtances of demand and supply of television sets

Qd = 2400 - 10p and Qs = 2p

then 2400 -10p = 2p

2400 = 12p

p = 200

Demand Qd = 2400 - 10p

Qd = 2400 - 10 (200)

Qd = 2400 - 2000

Qd = 400

Supply Qs = 2p

Qs = 2 (200)

Qs = 400

The demand and supply will be the equal if government bans the import of television set.