Question

Answer questions 6 through 12 based on the following information: Consider a domestic market (industry) for product X represented by Domestic Demand: p = 200 − 2q Domestic Supply: p = 2q where p and q represent price and quantity, respectively. Assume that the domestic market is perfectly competitive and that the world price of this product is $50 per unit.

9. If a 60% ad valorem tariff rate is in place, the domestic economy’s deadweight losses will sum to ___________. A) $50 B) $250 C) $450 D) none of the above

10. If a 60% tariff-equivalent quota policy is to be implemented, the import quota must be set at _______ units. A) 20 B) 25 C) 50 D) 65 11. If a 60% tariff-equivalent quota policy is to be implemented and the import licenses are auctioned, then there is the quota rent of _______ that will accrue to the domestic government. A) $300 B) $500 C) $600 D) $750

12. If the import quota is instead set at 10 units, which differs from the 60% tariff-equivalent quota, then the quota-induced product price facing domestic consumers and producers will be _______ per unit. A) $75 B) $80 C) $85 D) $90

Answer 1

9) New tariff rate = 60% of 50 = $30. Price after tariff = 30 + 50 = $80. At this price, Domestic demand is q = (200/2 - 80/2) = 60 units and domestic supply = 80/2 = 40 units  

Qd is reduced from 75 units to 60 units and quantity supplied is increased from 25 units to 40 units

DWL under this case = 0.5*30*(40 - 25) + 0.5*30*(75 - 60) = $450.

10) Since 60% tariff causes imports to be limited to 20 units, an equivalent quota should be 20 units

11) Quota rent = quota size x price increase = 20 x 30 = $600

12) Since quota is set at 10 units, new domestic price will be

200 - 2q = 2(q + 10)

200 - 2q = 2q + 20

180 = 4q

q = 45

Price P = 45*2 = $90.