Question

4. Suppose the domestic supply and demand curves for petroleum in the U.S. are, Qs = 10P - 300 Qd = 3000 - 20P Let the world trade price be $50 per barrel. 1) What is the equilibrium quantity of imports? 2) Suppose a specific tariff of $10 per barrel is imposed. Calculate Consumer surplus, producer surplus, and tariff revenue. 3) Suppose the government imposes an import quota of 1200 units of barrels. Find the trading price for petroleum.

Answer 1

1) At a price of $50 per barrel,

Qd = 3000 - 20(50) = 2000

Qs = 10(50) - 300 = 200

The equilibrium quantity of imports = Qd - Qs = 2000 - 200 = 1800

2) When a tariff of $10 is imposed, the new price becomes $60. At a price of $60,

Qd = 3000 - 20(60) = 1800

Qs = 10(60) - 300 = 300

Import quantity = 1800 - 300 = 1500

Consumer surplus = 0.5[(150 - 60) * 1800] = $81,000

Producer surplus = 0.5[(60 - 30) * 300] = $4,500

Tariff revenue = $10 * 1500 = $15,000

3) Import quota 1200 means

Qd - Qs = 1200

3000 - 20P - (10P - 300) = 1200

3000 - 20P - 10P + 300 = 1200

3000 - 30P + 300 - 1200 = 0

30P = 2100

P = 2100 / 30 = $70

Thus, the trading price for petroleum is $70 per barrel.