Question

Answer 1-5 with the following information:

Suppose the world price for shoes is $10 per pair. Domestic demand and domestic supply are determined by the following equations: Domestic Demand: p = 150 − 10q Domestic Supply: p = 5q where p and q represent price and quantity, respectively.

Suppose that the tariff protection policy based on the ad valorem tariff rate of 100%, as specified in (3) and (4), is replaced with a tariff-equivalent VER (Voluntary Export Restraint) scheme. Then the net loss to the domestic economy will increase to ________ .

A) $85 B) $95 C) $100 D) $105

Answer 1

At a world price of $10, Qd = (150/10 - 10/10) = 14 units and Qs = 10/5 = 2 units so imports = (14 - 2) = 12 units

With tariff-equivalent VER, domestic price rises by $10 x 100% = $10 to become $20. At this price, quantity

demanded = (150/10 - 20/10) = 13 units and quantity supplied = 20/5 = 4 units. Hence imports are reduced to (13 - 4) = 9 units

Net loss to the economy = efficiency loss + loss to the government from tariff revenue

= 0.5*(4 - 2)*10 + 0.5*(14 - 13)*10 + (13 - 4)*10

= $105

Select $105.